Making Tax Digital for small businesses: what you need to know

What is Making Tax Digital?

Making Tax Digital for Income Tax is a new way for sole traders and landlords to keep digital records and report income and expenses to HMRC.

Instead of completing all of the administration at the end of the tax year, businesses within the rules will use compatible software to keep digital records and send quarterly updates to HMRC.

Making Tax Digital for Income Tax does not mean that quarterly updates are four separate tax returns. The updates provide summaries of income and expenses, while the end-of-year tax return remains part of the process.

Who needs to use Making Tax Digital for Income Tax?

Making Tax Digital for Income Tax applies to individuals who are registered for Self Assessment and receive income from self-employment, property or both, where their qualifying income is above the relevant threshold.

Qualifying income is based on gross income from self-employment and property before expenses. It is not the same as your taxable profit.

The rules are being introduced in stages. From 6 April 2026, the requirement applies to sole traders and landlords with qualifying income of more than £50,000 based on the relevant previous tax year. From 6 April 2027, the threshold reduces to more than £30,000, and from 6 April 2028 it reduces to more than £20,000.

Partnerships are not currently required to use Making Tax Digital for Income Tax. HMRC has said that a future timetable for partnerships will be announced separately.

What is qualifying income?

Qualifying income is the total gross income from your self-employment and property income before expenses. This is sometimes described as turnover for the purposes of checking whether you are within the Making Tax Digital rules.

For example, a sole trader with £55,000 of business turnover and £20,000 of allowable expenses has qualifying income of £55,000, not £35,000.

This distinction is important because the Making Tax Digital thresholds are based on qualifying income rather than the profit remaining after business expenses.

When do the Making Tax Digital rules start?

The introduction of Making Tax Digital for Income Tax is being phased in according to qualifying income from previous tax years.

If your qualifying income was more than £50,000 for the 2024/25 tax year, you need to use Making Tax Digital for Income Tax from 6 April 2026 unless an exemption applies.

If your qualifying income was more than £30,000 for the 2025/26 tax year, you will need to use Making Tax Digital from 6 April 2027 unless an exemption applies.

If your qualifying income is more than £20,000 for the 2026/27 tax year, the requirement is due to apply from 6 April 2028 unless an exemption applies.

The relevant threshold is therefore based on the qualifying income from the applicable previous tax year, rather than simply looking at your current year turnover.

What digital records will you need to keep?

If you are within Making Tax Digital for Income Tax, you will need to keep the relevant business and property records digitally using compatible software.

Your digital records need to contain the information required to support your income and expense figures. The precise records you need will depend on the type of business or property income you have.

Keeping records digitally throughout the year can also make it easier to monitor your income, expenses and cash flow rather than trying to organise everything shortly before the tax return deadline.

What are quarterly updates?

Businesses within Making Tax Digital for Income Tax will need to send quarterly updates to HMRC using compatible software.

These updates contain summaries of income and expenses for the relevant period. They are not the same as submitting four separate Self Assessment tax returns.

The quarterly reporting process is intended to give HMRC information during the tax year while also encouraging businesses to keep their records up to date.

You will still need to complete the relevant end-of-year tax return and pay the tax due. HMRC states that the tax payment deadline remains 31 January following the end of the tax year.

What software can you use?

You will need software that is compatible with Making Tax Digital for Income Tax. The software needs to be capable of creating and storing the required digital records and sending the relevant information to HMRC.

If you already use accounting or bookkeeping software, check whether it supports Making Tax Digital for Income Tax rather than assuming that any accounting package will automatically meet the requirements.

Choosing software early gives you time to understand how it works, connect your bank feeds where appropriate and establish a bookkeeping routine before your reporting obligations begin.

How should a small business prepare?

The best preparation is to understand whether you are likely to be within the rules and then make sure your bookkeeping process is capable of keeping accurate digital records throughout the year.

Review your current turnover and previous tax returns to establish whether your qualifying income may put you within the relevant threshold. Remember that the test is based on gross income from self-employment and property before expenses.

If you are not already using accounting software, consider choosing a compatible system and getting familiar with it before you are required to send quarterly updates.

It can also help to separate business and personal transactions where possible and reconcile your records regularly rather than waiting until the end of the tax year.

What if you use an accountant?

You do not necessarily have to manage Making Tax Digital on your own. An accountant or tax adviser can help you understand whether the rules apply and can assist with compatible software, bookkeeping and reporting.

Where an agent acts on your behalf, you will normally need to authorise them to deal with Making Tax Digital services for you.

It is still important to understand the process and provide your accountant with complete and accurate information. Digital reporting does not remove the need for good records or timely communication.

Are there exemptions?

Some people may be exempt from Making Tax Digital for Income Tax. HMRC provides exemptions for certain circumstances, including some people who are unable to use digital tools because of their circumstances.

There are also automatic exemptions in specific situations. For example, people with qualifying income of £20,000 or less are currently automatically exempt from the Making Tax Digital for Income Tax obligations.

If you believe you should be exempt, check the current HMRC guidance because the rules and the circumstances qualifying for an exemption can depend on your individual situation.

Making Tax Digital and VAT

Making Tax Digital for Income Tax should not be confused with Making Tax Digital for VAT. VAT-registered businesses have already been required to keep digital VAT records and submit VAT returns using compatible software under the VAT rules.

A business can therefore have more than one Making Tax Digital obligation depending on its circumstances.

If you are both VAT registered and within Making Tax Digital for Income Tax, it is worth reviewing whether your accounting software can support the different requirements efficiently.

A simple preparation checklist

If you think Making Tax Digital may apply to your business, start by checking your qualifying income for the relevant tax year and identifying the date from which the rules apply to you.

Then check whether your current accounting software is compatible, make sure your income and expenses are being recorded accurately and establish a regular bookkeeping routine.

If you use an accountant, discuss the transition with them early so that you understand what information they need and whether they will handle the quarterly updates on your behalf.

Preparing before the deadline can reduce the risk of rushed bookkeeping, missing information or unexpected problems with your software.

Get ready before your start date

Making Tax Digital is a significant change for sole traders and landlords who are within the rules, but the transition does not need to be left until the last minute.

Understanding your qualifying income, choosing suitable software and keeping digital records regularly can make the process much more manageable.

If you are unsure whether the rules apply to you or how they will affect your bookkeeping and tax reporting, professional advice can help you understand the requirements based on your circumstances.