What Is Making Tax Digital?
Making Tax Digital (MTD) is a long-term plan put in place by the government to modernise the tax system.
It means that, eventually, all businesses, sole traders and landlords will need to keep digital records using MTD compatible and HMRC-approved software, submitting their figures every quarter.
Why Is Making Tax Digital Being Introduced?
Key reasons for the government digitising the UK tax system include:
- Bringing the tax system closer to real time.
- Making it easier for both individuals and businesses to get their taxes right and avoid making errors that could lead to fines.
- Making it so that people can integrate tax management with a range of business processes via software.
- Contributing to wider productivity gains for businesses by encouraging digitalisation.
Who Does Making Tax Digital Apply To?
There’s been an ongoing phased rollout of MTD since 2019, with VAT-registered businesses being the first to test out the system.
MTD for VAT applies to all VAT-registered businesses above the VAT threshold (which is currently £90,000 taxable turnover – May 2026), as well as those who register for VAT voluntarily.
The most recent change, MTD for Income Tax Self-Assessment (ITSA), came into force on the 6th of April 2026 and only affects sole traders and landlords once they reach certain thresholds.
You will be affected from:
- 6th April 2026, if you have an annual business or property income of more than £50,000
- April 2027, if you have an annual business or property income of more than £30,000
- April 2028, if you have an annual business or property income of more than £20,000
MTD for ITSA does not apply to limited companies. This is because limited companies deal with Corporation Tax instead of Income Tax, which is not currently part of any plans within the MTD system.
Making Tax Digital Responsibilities
If you are a sole trader or landlord who is affected by MTD for ITSA, then you will need to:
- Keep digital records of your income and expenses using HMRC-compatible software.
- Submit quarterly updates to HMRC on: 7th August, 7th November, 7th February and 7th May. These will give you an estimated tax bill as you go along. They do not trigger payments and can be corrected later if needed.
- Complete a final end-of-year declaration – you’ll do this after your fourth quarterly update. This replaces the traditional self assessment return and is where everything is checked, corrected and finalised. The deadline date remains the same and is still due by the 31st of January following the end of the tax year.
Making Tax Digital Penalties
After the first tax year (2026/27 – which is being treated as a ‘soft landing’ period), the penalties for late quarterly updates will work on a points-based system.
The penalty point threshold is 4 points. If you reach this figure, you will face a:
- £200 penalty
- £200 penalty each time you miss another submission deadline
If you receive penalty points but you’re below the threshold, each point will be removed 24 months after the missed deadline; however, if you reach the threshold, these will only be removed once you have:
- sent quarterly updates and submitted your tax return on time for the next 12 months, and
- sent any outstanding quarterly updates and submitted any outstanding tax returns for the previous 24 months.
For late payments, penalties will work on a time-based system.
You won’t receive a penalty for up to 15 days of missing payment; however, late payment interest starts from the first day that your payment is late.
Penalties will work in the following way:
- If you are 16 to 30 days late paying: The penalty is 3% of the tax owed on day 15 in the 2026/27 tax year and 4% in 2027/28. If it’s your first year, then you won’t receive a penalty.
- If you are 31 days or more late paying: The penalty is 3% of the tax owed at 15, and 3% of the tax owed at day 30 (2026/27) and 4% of the tax owed at 15, and 3% of the tax owed at day 30 (2027/28).
There will also be an annual rate of 10% per year on the outstanding amount, which will be charged daily from day 31 until the owed tax is paid, or for up to two years.
What Do I Need to Know About Making Tax Digital Software?
The software that you use for submitting your digital records must be MTD compatible and HMRC-approved.
While many sole traders and landlords might prefer to use spreadsheet apps like Excel, as it’s a low-cost and familiar system, this is simply not enough to meet your MTD obligations and can compromise compliance.
It’s possible to store your income and expenses figures in a structured format through Excel, but the data links must be able to flow between systems without manual rekeying.
You’d need bridging software to act as the connector between Excel and HMRC; taking spreadsheet data, converting it into the correct format and then submitting it to HMRC.
The best MTD software includes features such as:
- Quarterly MTD submissions
- Bank feeds
- Receipt capture
- Accountant access
- VAT support
- Mobile app access
Making Tax Digital – How We Can Help
At Dolan Accountancy, our package provides everything you need to meet your MTD requirements.
We can help to:
- Set up compliant digital bookkeeping through FreeAgent
- Manage your quarterly submissions
- Keep your records accurate and up to date
- Ensure you stay fully compliant and stress-free
Our MTD package includes everything you need and is just £25 +VAT per month.
If you’re an existing client, we charge an additional £10 + VAT per month to take care of your MTD needs.
If you have any further questions, our team of experts are available to answer any queries, so give us a call on 01442 795 100 or email jaime.thorpe@dolanaccountancy.com. Alternatively, contact us via live chat.
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