Making Tax Digital: What Businesses Need to Know in 2025

Making Tax Digital (MTD) is HMRC’s long-term initiative to modernise the UK tax system. Its aim is to reduce costly errors, close the tax gap, and make tax administration simpler for businesses and individuals. In practice, MTD means keeping digital records and using HMRC-compatible software to submit tax returns directly, instead of relying on paper forms or manual entries.

What is Making Tax Digital?

Introduced in 2019, MTD requires businesses to maintain digital records and send tax data to HMRC using approved accounting software. This system helps minimise errors in VAT and Income Tax filings, giving business owners greater control and visibility over their finances.

At its core, MTD is about bringing tax reporting closer to “real time,” meaning businesses update HMRC quarterly rather than waiting until the end of the year.

Current Scope: VAT

Since April 2019, MTD has applied to all VAT-registered businesses with a taxable turnover above the VAT threshold (currently £90,000 in 2025). From April 2022, all VAT-registered businesses, regardless of turnover, were brought into the scheme.

This means that if your business is VAT-registered, you must:

Keep digital VAT records.
Use MTD-compatible software.
Submit VAT returns electronically via HMRC’s system.

You can check HMRC’s official MTD for VAT guidance here.

MTD for Income Tax (MTD for ITSA)

The next major step is MTD for Income Tax Self Assessment (ITSA), which will affect self-employed individuals and landlords.

From April 2026, MTD for ITSA becomes mandatory for those with annual business and/or property income above £50,000.
From April 2027, the threshold lowers to £30,000.
Partnerships and smaller income groups will be included at a later stage, though dates are still under review.

Those affected will need to keep digital records and send quarterly updates to HMRC instead of filing one Self Assessment return each year. You can find official details on MTD for ITSA.

Exemptions from MTD

Although HMRC’s aim is for all businesses to eventually comply, exemptions may apply if:

It is not reasonably practical to use digital tools due to age, disability, or remote location.
Your business is undergoing insolvency procedures.
Using electronic systems conflicts with your religious beliefs.

Applications for exemption must be made directly to HMRC.

Penalties for Non-Compliance

MTD also ties into HMRC’s updated late-submission penalty system. Since January 2023, VAT late filing penalties use a points-based system:

Each missed submission adds a penalty point.
Reaching the threshold triggers a £200 fine.
Additional late submissions while at the threshold also incur a £200 penalty.

These rules will apply to Income Tax submissions once MTD for ITSA comes into effect.

Benefits of Making Tax Digital

Adopting MTD can deliver significant advantages:

Greater accuracy – Digital records reduce errors in reporting.
Efficiency – Automated updates save time compared to manual entries.
Real-time visibility – Quarterly updates give a clearer picture of tax liabilities.
Flexibility – Cloud-based accounting software enables access anywhere, anytime.

For many businesses, MTD is not just compliance—it’s an opportunity to modernise bookkeeping practices.

Challenges and Costs

The main drawback is the need for MTD-compatible accounting software. While many providers (such as Xero, QuickBooks, and Sage) offer affordable monthly subscriptions, this still represents an extra cost for small businesses. Reliable internet access is also essential, which can pose challenges in rural areas.

How to Register for MTD

If your business isn’t already signed up, here’s how to register:

Ensure you have MTD-compatible software.
Visit HMRC’s sign-up page.
Provide your Government Gateway ID, VAT number (if applicable), and business details.
Wait for HMRC’s confirmation email before submitting returns.

Note: Newly VAT-registered businesses are automatically enrolled in MTD.

Final Thoughts

Making Tax Digital marks a shift towards a fully digital UK tax system. While the transition may feel daunting, the long-term benefits—greater accuracy, efficiency, and real-time insights—make it worthwhile.

If you’re a VAT-registered business, compliance is already mandatory. And if you’re self-employed or a landlord, now is the time to prepare for MTD for ITSA in 2026.

By adopting the right digital tools today, you’ll not only stay compliant but also gain a clearer view of your finances—helping your business grow with confidence.

Prepare for Making Tax Digital with Kletta

Making Tax Digital is transforming how UK sole traders and small businesses manage their taxes. Kletta makes the transition effortless. Our app helps you keep digital records, stay compliant, and prepare for quarterly submissions — all in one simple system.

And if you work with an accountant, they can use Kletta too. Accountants can easily manage their clients’ sole trader records through the app, ensuring everything stays MTD-ready and up to date.

Frequently Asked Questions about Making Tax Digital

1. When must I start using MTD for Income Tax if I'm self-employed or a landlord?

MTD for Income Tax is rolling out in phases based on gross income:

From 6 April 2026, it becomes compulsory for those whose total income from self-employment and/or property exceeds £50,000 in the 2024–25 tax year.
From 6 April 2027, the threshold lowers to £30,000 (for 2025–26 income).
From 6 April 2028, it further decreases to £20,000 (for 2026–27 income)

2. Can I opt in to use MTD voluntarily before it's mandatory?

Yes! You don’t have to wait. HMRC allows early voluntary sign-up. In fact, agents or individuals can choose to register early and begin submitting quarterly digital updates ahead of the official deadlines GOV.UKGov.uk. This gives you a head start on adapting to the system and getting comfortable with the new processes.

3. What kinds of exemptions exist from MTD requirements?

HMRC recognizes that digital compliance may not be practical in every situation. Exemptions can be granted on grounds like:

Age, disability, or living in a remote location preventing digital participation
Ongoing insolvency procedures
Religious beliefs that conflict with using digital systems

If one of these applies to you, you can formally apply to HMRC for exemption.

4. Will I still file an annual tax return under MTD, or just quarterly updates?

Quarterly digital submissions do not replace your annual return. Under MTD:

You'll send quarterly summaries of your self-employment and/or property income and expenses to HMRC.
At the end of the tax year, you'll still file a final annual self-assessment return, but much of the work will be pre-filled via your quarterly updates. You’ll review, adjust if needed, and submit—streamlining the process