Completing your next tax return may be the furthest thing from your mind right now. In fact, you’re likely relieved that the 31 January deadline for filing the last one is behind you and you don’t need to do anything for another year.
However, have you thought about how prepared you are (or not) for the Government’s plan to go fully paper-free? Making Tax Digital (MTD) is radically changing how businesses deal with HMRC and the rollout has already started.
“Something that every small business owner needs to bear in mind is that Making Tax Digital will happen,” says Carl Reader, co-owner of accountancy firm DT group. Despite a lot of scepticism about MTD, Reader acknowledges that going digital is the direction of travel for dealing with tax globally.
We spoke to small business owners who have successfully made the switch and are glad they did. Read on for your four-step guide to getting MTD-ready.
1. Understand who, what, and when MTD applies
If your business is VAT-registered, you’ll already be familiar with Making Tax Digital.
Since 2022, you’ll have been keeping digital records and submitting tax information using approved software.
But from 6 April 2026, it becomes compulsory for businesses and sole traders who earn over £50,000 per year to do the same.
Your business needs to be “in the MTD system” by the 6 April 2026 deadline, so that transactions on your business account (income and expenditure) will be recorded digitally for subsequent tax calculations. The deadline is to make sure money moving in and out of your business from the start of the 2026-27 tax year is captured by MTD.
Small businesses and sole traders who will have made over £50,000 by the time the current tax year finishes (April 2025), need to have signed up to MTD and selected some compatible software by April 2026.
A year to get ready might seem like a long time, but why not start before the deadline looms and things get stressful?
In some circumstances, business owners may be exempt from MTD. You can check the criteria on gov.uk. For example, if you start a new business between 6 April 2025 and 5 April 2026, you won’t have to comply with MTD until after your first Self Assessment. However, choosing to sign up from the outset will mean you’re well-prepared when the process becomes mandatory.
From 6 April 2027, the threshold for those needing to go digital changes to £30,000 with plans to lower it to £20,000 in the future.
Lauren Chiren, a self-employed menopause coach, told NerdWallet that signing up for MTD was “the best decision I ever made.” She adds that “it really simplified everything for me.”
Take Action: Register for Self-Assessment
If your business or side hustle will make more than £1000 income in a tax year, you must report this to HMRC. The deadline for paying income tax on profits made in the 2023-24 tax year is 31 January 2025. If you’ve already done this, read on.
Learn about Self Assessment here.
2. Select your accounting softwar
Accounting software is a digital system for sorting your day-to-day business finances. Many people synchronise the software with their business bank account so even more tasks are automated, like tracking expenses. If you currently use accounting software, you’re already partway through preparing for MTD.
“If you are still using manual records, or just handing a box of paperwork to an accountant at the last minute, then you need to strongly consider how you will manage this change,” says Reader, who has seen the adoption rate of accounting software accelerate in recent years.
Marie Brown started her website design business, Beyond the Kitchen Table, in 2017 and used a spreadsheet for her bookkeeping. “Before I started using accounting software it was a complete headache,” says Brown, adding that moving to digital software has made working out her profit and loss really easy.
Brown has tried several online accounting tools, including Wave and Quickbooks, but she currently uses FreeAgent, which syncs with her Starling business bank account. She currently pays more than £300 annually to use the platform, but she is considering opening a business bank account with Natwest or Mettle to access FreeAgent for free.
Dara Stringham, a self-employed tailor, has taken advantage of FreeAgent as a perk. “I tried Xero initially but found it too expensive for my use. NatWest offered [FreeAgent] free with their business banking, so I tried it and haven’t looked back,” says Stringham.
Take Action: Choose accounting software
Since you’ll need accounting software for MTD at some point in the future (some business owners earlier than others), it would be wise to start looking at your options and getting familiar with the software sooner rather than later.
If you’ve not yet opened a business bank account, explore your options now, keeping in mind that many providers partner with accounting software providers so you could kill two birds with one stone.
3. Make your accounting software work harder, so you don’t have to
Once you’ve chosen accounting software that suits you and your business, connect your online banking to automatically import your transactions.
Many platforms let you generate customised quotes, invoices, purchase orders and more, often from an app downloaded to your mobile phone.
Preparing for MTD may be an opportunity for small business owners to review how they manage their finances. “You never know, you might find something that saves you heaps of time going forward,” Reader adds.
Having HMRC-approved software is key because it ensures that money moving in and out of your business is captured by MTD and reported directly to the tax office, without you needing to manually enter numbers into an online form. Using MTD-compatible accounting software has the advantage of showing your current tax position (what you owe, and by when) at a glance. It can also reduce the likelihood of errors.
Take action: Check you have HMRC approved software
Paying for accounting software is offputting to small business owners who have managed without it until now. But, to comply with MTD, approved software is a non-negotiable.
Many software providers, including Clear Books, Freshbooks and Xero, offer a 30-day free trial, so you can explore the features before you commit – what works intuitively for one person may not work well for others.
4. Organise your timeline
Filing tax returns is few people’s idea of fun, and many solopreneurs and small business owners leave this task to the last minute. However, MTD will require small businesses to file financial information quarterly, just like businesses with a higher income level. Your accounting software will provide your total income and expenditure every three months, so there’s no need for you to do the sums.
“Set a reminder for yourself every quarter to make sure that you process your bookkeeping and file the information,” says Reader. While this might seem like extra work, updating your financial records quarterly actually helps you to spread the load compared with a single annual return, Reader explains.
Chiren, who uses Xero accounting software, agrees. “It takes away that last-minute pain of calculating year end – everything is all tracked and in one place,” she says.
Take Action: Switch on notifications
As well as setting your own reminders, it’s worth signing up to receive emails from HMRC, which can prompt you as the deadlines to file financial information approach. Your accounting software should notify you when it’s time to submit a quarterly update, so ensure you have enabled notifications.
It’ll be worth it
The sooner you sign up to MTD, the sooner you can lean on digital technology to do some of the hard work for you.
Switching to accounting software in readiness for MTD could uncover unexpected benefits. For example, Chiren used her accounting software to download a list of recent customers who she could reconnect with to generate repeat business.
“Take a little bit of time, just understand it and then embrace it,” Brown encourages. “In the long run, it will make your life so much easier”.
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