What You Need to Know About Making Tax Digital: A Guide for UK Small Business Owners
From 2026, how small business owners in the UK pay income tax is set to change, and it’s important to get ahead of it.
Making Tax Digital (MTD) is HMRC’s new initiative to modernise the UK tax system. It aims to make tax administration more efficient, more accurate, and easier for taxpayers to get it right. While VAT-registered businesses have already been adjusting to MTD, from April 2026, the rules will begin to apply to self-employed individuals and landlords as part of a phased rollout.
Here’s what you need to know.
What Is Making Tax Digital (MTD)?
Making Tax Digital is a government-led initiative to replace the traditional Self Assessment tax system with a fully digital one. Instead of submitting a single Self Assessment tax return once a year, affected taxpayers will need to:
- Keep digital records using compatible software
- Submit quarterly updates to HMRC
- File an End of Period Statement (EOPS) and a Final Declaration each year
Who Will Be Affected?
From April 2026, MTD for Income Tax Self-Assessment (MTD for ITSA) will apply to:
- Self-employed individuals (sole traders)
- Landlords who earn income from property rentals
- Those with a combined business and/or property turnover of over £50,000
From April 2028 the threshold is scheduled to fall further to £20,000.
If your income is below £30,000, MTD does not yet apply — but this may change in future.
What Will Change?
1. Quarterly Submissions
Instead of one tax return per year, you’ll need to send a summary of your business income and expenses to HMRC every 3 months and within 30 days of the quarter.
2. Digital Record Keeping
You must keep digital records of all income and expenses. This means using MTD-compatible accounting software — spreadsheets alone won’t be enough unless used with approved bridging software.
3. End of Period Statement (EOPS)
At the end of your accounting period, you’ll confirm that your quarterly reports were accurate and make any necessary adjustments.
4. Final Declaration
Think of this as replacing your current Self Assessment. It declares all your income (including other income streams like dividends or pensions) and calculates your final tax bill.
What Should You Do to Prepare?
- Check Your Income Threshold
If your self-employment or property income exceeds £50,000, you’ll be included in the first phase. Know your numbers. - Start Using Accounting Software
Switch to MTD-compatible software like QuickBooks, Xero, FreeAgent, or Sage. Many offer free trials, and some banks (like NatWest) offer them at discounted rates for customers. - Get Comfortable with Quarterly Reporting
This might feel like more admin at first, but regular updates could help you stay on top of your finances and avoid big year-end tax surprises. - Work With an Accountant
If you’re unsure how to manage the transition, now’s the time to speak to an accountant or tax adviser who understands MTD.
Why Is HMRC Doing This?
HMRC’s aim is to reduce tax errors, which currently cost the UK billions each year. By encouraging real-time reporting and better digital records, the government hopes to create a more accurate and efficient tax system for all.
Final Thoughts
Making Tax Digital may feel like a significant shift, especially for small businesses and sole traders accustomed to annual tax returns. But with the right tools and support, you can adapt smoothly and even benefit from better financial visibility throughout the year.
Don’t wait until 2026. Start digitising your records and exploring software options now so you're ready for the change — and avoid any last-minute panic.
Need Help?
If you have questions about Making Tax Digital or need support getting started, PG Owen is here to help. Whether you need help choosing the right software, understanding your obligations, or just want reassurance that you're on the right track, we're just a call or email away.
Get in touch today to make the transition to digital tax stress-free and simple.