From April, more than 864,000 taxpayers will need to follow new digital tax rules under Making Tax Digital (MTD) for Income Tax.
If you’re a sole trader or landlord earning more than £50,000 a year, you’ll be among the first to move across. Those earning more than £30,000 will follow from April 2027.
HMRC estimates that around 40% of people affected don’t use an accountant or tax adviser. So if you handle your own tax return, you’ll need to get used to keeping digital records and submitting updates through compatible software. Choosing the right package will be essential if you want to stay compliant and avoid penalties.
Here, Which? explain the different types of MTD software available and what to look for, so you can find an option that works for you.
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What’s changing?
MTD involves keeping digital records of your accounts and sending updates to HMRC every three months, rather than filing one final return annually by January 31.
HMRC says the move to digital records and more regular reporting should help taxpayers see an estimate of their tax bill throughout the year, making it easier to budget.
To comply with the rules, you must use HMRC-recognised software. There are more than 60 software products currently listed by HMRC, aimed at both agents and individual taxpayers, and the list is updated regularly.
HMRC has launched a tool on Gov.uk to help you find the most suitable MTD software for your needs. All you need to do is answer a few questions about you and your business.
- Find out more: Making Tax Digital explained
How much will MTD cost?
HMRC estimates that MTD could cost businesses up to £465 on average in the first year. This includes an average ‘one-off’ transitional cost of around £280 to £350 per business, plus an additional average annual cost of £110 to £115 for day-to-day use.
But every business will have different accounting needs, which could affect the cost of transitioning to MTD.
As MTD is mandatory, you will need to incorporate the newly added costs into your business budgets.
There are free MTD-compatible software options available, but these are generally designed for those with straightforward tax affairs. Free versions often have limited functionality and may not include tools such as invoicing, bank feeds or automated expense tracking.
- Find out more: how to calculate your tax bill
What types of MTD software are available?
There are different types of MTD-compliant software, including:
- software packages that can be used to keep digital records and submit data to HMRC
- Application Programming Interface (API) enabled spreadsheets, which have an inbuilt function allowing them to send data to HMRC
- bridging software that can take information from an existing spreadsheet (such as Excel) and submit it to HMRC.
If you use a spreadsheet, it’s important to note that you can’t manually retype your data into another program to complete your tax updates. The information must move between systems digitally to ensure it stays accurate and complies with the rules.
Also, not all products support submitting the MTD tax return, which is the final step in the MTD compliance cycle.
What to look for in accounting software
When choosing MTD-compliant software, the cheapest option may not be the best for your specific needs. Similarly, recommendations from friends also might not suit your business, even if they mean well.
Here is a list of key features to consider when choosing your software:
After you’ve chosen your software
Once your software is sorted, you can sign up for MTD for income tax. Individuals can sign up themselves, while agents can sign up on behalf of their clients. After signing up, you must link your software to HMRC.
To authorise your software as a sole trader or landlord, follow these steps:
- Open your software and select the option to connect with HMRC.
- Enter the same user ID and password you used to sign up for MTD.
- Complete the identity check by entering your personal details or information from your ID documents if asked.
- Give the software permission to connect to HMRC.
You will need to reconnect your software every 18 months, but you won’t need to repeat the identity check. Most software will send you a reminder when it’s time to do this.
Once everything is set up, you will use your software to keep digital records and send quarterly updates to HMRC. You will also have access to a special HMRC support team, and can use your online account to check or change your business details.
- Find out more: online tax returns explained
