Understanding Making Tax Digital (2025 update)

Making Tax Digital (MTD) is a government initiative aimed at making it easier for individuals and businesses to get their tax right and keep on top of their business affairs.​

MTD involves more frequent information sharing with HMRC throughout the year, rather than a single tax return at the end of the year. ​

MTD is already compulsory for businesses above the VAT registration threshold (£90,000). MTD for Income Tax will now be introduced in a phased approach starting from 6 April 2026, while a major policy reversal has seen MTD for Corporation Tax cancelled entirely.​

In this article, we’ll cover:​

Making Tax Digital for VAT is the most established part of the program, having been live since its initial introduction in 2019. It is now compulsory for all VAT-registered businesses, regardless of their taxable turnover, as of April 2022. This includes businesses that are voluntarily registered below the VAT threshold. As of 1 April 2024, the VAT registration threshold has also been updated, increasing from £85,000 to £90,000.​

All VAT-registered businesses must now use HMRC-approved, MTD-compatible software to keep VAT records and file VAT returns. HMRC now automatically signs up new VAT-registered businesses for MTD for VAT, removing the need for a separate sign-up process.​

MTD for VAT requires you to keep records digitally, including:​

The original plan to mandate MTD for Income Tax Self Assessment (ITSA) from 6 April 2024 was abandoned. Instead, HMRC has adopted a phased, tiered approach based on income levels.​

The new timeline is as follows:​

For MTD for income tax, taxpayers will need to:​

A new points-based penalty system for late submissions will also go live with MTD for ITSA in April 2026. Each late quarterly submission will incur one penalty point, with a £200 fine being triggered after four points are accumulated. The payment deadlines for income tax remain the same as under the current Self Assessment system, due on 31 January and 31 July each year.​

A major and unexpected development is the cancellation of MTD for Corporation Tax. While it was initially slated to be mandated from 2026, HMRC has now announced that it will no longer proceed with a compulsory digital reporting regime for corporations.​

HMRC stated the decision was made due to the “diverse needs of the corporation tax population”. This signals a recognition of the complexities of the tax and suggests that future modernisation efforts for corporation tax will likely focus on a more tailored approach, rather than a “one-size-fits-all” digital strategy.​

Making Tax Digital is an ever-evolving initiative, and it's your responsibility to ensure that you are ready for MTD and are compliant when it comes along. ​

If you engage an accountant, such as Beany, they can take away this burden. It’s their job to keep on top of the MTD updates and requirements, and know what’s required and when. ​

In short, Making Tax Digital (MTD) is a government initiative aimed at helping individuals and businesses get their tax right. HMRC estimates that billions of pounds are lost every year as a result of individuals and businesses not paying the right amount of tax and MTD is an initiative to address this.  ​

The frequency of reporting to HMRC will increase under MTD, however this is not necessarily a bad thing. More frequent reporting means that there is a need to keep more on top of your finances throughout the year, rather than leave it all to the last minute.​

MTD is a great opportunity to get on top of your day to day bookkeeping, or engage an accountant to do this for you. This means that when it comes to reporting to HMRC you will already be most of the way there. ​

A key benefit of MTD to you as an individual and business owner is that you will know throughout the year an estimate of your tax liability, which will be calculated based on the information you submit to HMRC. This will help you budget and save for your tax bill and will avoid any surprises come the end of the year. ​

As mentioned above, MTD also means there will be less stress at year-end as you frantically try to collate all the information needed to submit your tax return, as you will have already reported this to HMRC and will have all the information stored in your MTD-compatible bookkeeping software. ​

Yes. MTD requires submission of information via MTD-compatible software. Xero is an example of bookkeeping software that is compatible for MTD for VAT and income tax. ​

Here is a list of all software that is compatible with MTD for VAT.​

Here is a list of al software that is compatible for MTD for income tax. ​

HMRC do not provide free MTD software. If you’re unsure about what software to get then speak to your accountant or bookkeeper. ​

MTD is compulsory for all VAT-registered businesses, regardless of their turnover. MTD for income tax will become compulsory from April 2026 for sole traders and landlords who meet the relevant income thresholds.​

HMRC grants exemption from MTD if it’s not practical for you to use software to maintain digital records and submit data to HMRC. ​

It may not be practical due to your age, disability, location, religion or another justifiable reason. ​

You will need to explain your reason to HMRC and if an exemption is granted an alternative solution will be found. ​

The best way to prepare is to begin using MTD-compatible software to keep digital reocrds of your business's finances.​

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