Let's Break it down
Making Tax Digital (MTD) software is HMRC‑compatible software that allows UK businesses, sole traders, and landlords to keep digital records of income and expenses and submit tax information directly to HMRC.
MTD is required by law for VAT-registered businesses since April 2022, for sole traders and landlords with income over £50,000 from April 2026, over £30,000 from April 2027, and over £20,000 from April 2028.
Key Facts at a Glance
Making Tax Digital software helps businesses maintain digital tax records and submit data directly to HMRC. It comes in cloud accounting platforms, bridging software, desktop tools, and lightweight apps.
Costs range from free basic options to full-featured software costing around £60 per month. MTD replaces manual VAT submissions and paper Self Assessment returns. HMRC maintains an official MTD software list on GOV.UK where you can verify compatibility.
What Is Making Tax Digital and Why It Matters
Making Tax Digital is a UK government programme designed to move businesses and individuals from paper-based or manual record keeping to fully digital systems.
Its goals are to reduce errors, close the tax gap, and give taxpayers a clear view of their tax position throughout the year. The programme began with VAT and is now expanding to Income Tax Self Assessment (ITSA) for sole traders and landlords.
MTD Software Requirements by Tax Type
MTD for VAT requires all VAT-registered businesses to keep digital VAT records and submit VAT returns directly via the MTD API. This has been mandatory since April 2022.
MTD for ITSA replaces the annual Self Assessment for qualifying sole traders and landlords with quarterly digital updates and a year-end final declaration. Mandation dates are April 2026 for income over £50,000, April 2027 for income over £30,000, and April 2028 for income over £20,000.
MTD for Corporation Tax is currently under consultation, with no confirmed mandation dates. Limited companies are not yet in scope.
What MTD-Compatible Software Must Do
MTD-compatible software must maintain digital records of income and expenses, prepare VAT returns or ITSA quarterly updates, and submit data directly to HMRC via the MTD API.
For ITSA specifically, the software should support quarterly updates for each income source, generate End of Period Statements (EOPS), and complete a final year-end declaration. Software that cannot submit directly to HMRC does not meet MTD requirements.
Types of MTD Software
Cloud Accounting Software is an all-in-one platform that handles bookkeeping, invoicing, bank feeds, VAT and ITSA submission. It is best suited for sole traders, landlords, freelancers, small businesses, and accountants. Key features include bank feed integration, invoice creation, submission tools, and financial reporting.
Bridging Software connects spreadsheets to HMRC’s API and is ideal for spreadsheet users or accountants managing multiple clients. Its focus is compliance only, as it does not include invoicing or reporting. Manual re-typing breaks compliance.
Desktop Accounting Software is traditional software updated for MTD submissions, suitable for users with low internet access or existing desktop users.
Lightweight MTD Apps are mobile or browser-based applications for small businesses that track income and expenses and submit directly to HMRC. They are best for simple finances with low transaction volumes.
How to Choose MTD Software
When choosing software, check for compliance with HMRC, functionality such as bank feed integration and receipt capture, usability with guided onboarding and mobile access, collaboration features like multi-user access, and practical factors including pricing, support, and data export options.
MTD Software by User Type
Freelancers and sole traders should select software that tracks income and expenses, integrates with bank feeds, supports ITSA updates, and offers invoicing. Landlords need software that separates property income and maintains records for agent fees, insurance, and mortgage interest.
VAT-registered businesses should ensure support for the Flat Rate Scheme, Cash Accounting, and partial exemption. New businesses need scalable software that sets up compliant records from day one. Even businesses with accountants remain responsible for maintaining digital records.
Understanding Digital Links
A digital link ensures an electronic transfer of data without manual re-keying. Valid digital links include automated imports/exports, API connections, or structured copy-paste.
Manual entry or reading totals from spreadsheets is invalid. Breaking the digital link is the most common MTD compliance error.
Quarterly Updates and the Final Declaration
MTD requires quarterly updates, where income and expense summaries are submitted four times a year on 5 July, 5 October, 5 January, and 5 April.
The final declaration consolidates all income, adjusts pensions or Gift Aid, and triggers tax liability. For ITSA users, this final declaration replaces the annual Self Assessment.
MTD Penalties
Late submissions use a points-based system, and reaching the threshold triggers financial penalties. Points expire with sustained compliance.
Late payments incur HMRC interest and penalties. Failure to maintain digital records or use compliant MTD software results in additional penalties.
Checking HMRC Compatibility
Always check HMRC’s official software list on. Filter by tax type, business type, and accessibility.
Being listed for MTD for VAT does not guarantee ITSA compatibility. Always verify the software scope for your circumstances.
Final Summary
VAT-registered businesses should adopt MTD for VAT immediately. Sole traders and landlords should check income thresholds for April 2026, 2027, and 2028 and review HMRC’s software list. Discuss options with your accountant and adopt software early to become familiar with it.
Apps like the Pie Tax app simplify MTD compliance by combining guided filing, real-time tax tracking, and digital record keeping for VAT and ITSA in one mobile platform.
