Understanding Making Tax Digital (MTD) for New Businesses: Your Complete 2025 Guide

Starting a new business is exciting, but navigating UK tax requirements can feel overwhelming. If you’re launching or running a small business, you’ve probably heard about Making Tax Digital. But what does it actually mean for you, and when do you need to worry about it?

In this guide, we’ll break down everything you need to know about Making Tax Digital in plain English, so you can focus on growing your business with confidence.

What Is Making Tax Digital?

Making Tax Digital is HMRC’s initiative to modernise the UK tax system by moving away from paper records and spreadsheets to fully digital record-keeping and reporting. Think of it as the government’s push to bring tax administration into the 21st century.

The programme has two main components that affect small businesses:

MTD for VAT – Introduced in April 2019 for businesses with turnover above £85,000, then extended to all VAT-registered businesses from April 2022

MTD for Income Tax – Rolling out from April 2026 for sole traders and landlords

For most new businesses, MTD represents a shift in how you track your finances and report to HMRC, requiring the use of approved software rather than manual methods.

Do You Need to Comply with MTD?

Whether MTD affects your business depends on two factors: your business structure and your income level.

MTD for VAT

MTD for VAT was introduced in April 2019 for businesses with turnover above the £85,000 VAT threshold. From April 2022, it became mandatory for all VAT-registered businesses, regardless of turnover. If you’re VAT-registered now, you’re required to comply with MTD for VAT, and HMRC automatically signs you up for Making Tax Digital when you register.

This means you must:

• Keep digital records of your VAT transactions
• Use MTD-compatible software to submit your VAT returns
• Maintain digital links between different parts of your record-keeping system

MTD for Income Tax

MTD for Income Tax applies to sole traders and landlords based on their “qualifying income” – essentially your gross income before expenses.

Here’s the timeline:

From April 2026: Mandatory for those with qualifying income over £50,000 in the 2024-25 tax year

From April 2027: Threshold drops to £30,000 (affecting an estimated 970,000 individuals)

From April 2028: The government has set out plans to lower the threshold to £20,000, subject to legislation

Important note: Qualifying income is calculated before deductions. Even if your net profit is below the threshold after expenses, you may still need to comply if your gross income exceeds it.

For example, if you run a consultancy and invoice £55,000 in a year but have £20,000 in expenses, your qualifying income is £55,000 – meaning you’d need to use MTD from April 2026.

Who’s Exempt?

You won’t need to use MTD for Income Tax if:

• You don’t have a UK National Insurance number by 31st January before the start of the tax year
• You’re a foster carer or shared lives carer with only qualifying care income
• You have a religious objection to using computers
• You’re digitally excluded due to age, disability, or remote location
• You’re unable to use digital tools for other specific reasons outlined by HMRC

What MTD Means for Your Day-to-Day Business

If MTD applies to you, here’s what changes:

Digital Record-Keeping

Say goodbye to shoeboxes of receipts and manual spreadsheets. You’ll need to maintain digital records of all your business income and expenses using HMRC-approved software.

This includes:

• All sales and income
• Business expenses and purchases
• VAT (if applicable)
• Assets and liabilities

The good news? Once you’re set up, digital record-keeping is often easier and more accurate than manual methods.

Quarterly Updates

For MTD Income Tax, you’ll need to submit quarterly updates to HMRC through your software. These aren’t full tax returns – they’re summary updates of your income and expenses for the quarter.

The deadlines are typically:

• 7th August
• 7th November
• 7th February
• 7th May

These updates give HMRC (and you) a real-time view of your financial position throughout the year.

End-of-Year Final Declaration

By 31st January following the end of the tax year, you’ll submit your final declaration through your MTD software. This is essentially your annual tax return, confirming your total income and tax owed for the year.

Choosing the Right MTD Software

One of the biggest decisions you’ll make is selecting software that works for your business. HMRC doesn’t recommend specific products, but maintains a list of recognised software providers.

What to Look For

When choosing MTD software, consider:

Your income sources: Does it support self-employment income, UK property, or foreign property? Make sure it covers everything you need.

Ease of use: If you don’t have an accounting background, look for user-friendly options with good support and training resources.

Bank feeds: Can it connect directly to your business bank account to automatically import transactions?

Invoicing and expenses: Does it handle invoicing, receipt scanning, and expense tracking?

Integration: Does it work with other tools you use, like payment processors or e-commerce platforms?

Price: Costs vary significantly. Some providers offer free versions with basic features, while comprehensive packages can run £10-50+ per month.

Support: What level of customer support is included? UK-based support teams can be invaluable when you’re learning.

Popular MTD Software Options

While we always recommend discussing your specific needs with an accountant, here are some commonly used options:

Xero – One of the most popular choices for UK small businesses, offering comprehensive features with good third-party integrations. Plans start around £14/month. Recommended by Nava.

QuickBooks – Another major player with strong features for invoicing, expenses, and payroll integration.

FreeAgent – Particularly popular with freelancers and contractors. Some bank account holders get it for free. Recommended by Nava.

Sage – Long-established UK accounting software with various product tiers.

The key is finding software that matches your business complexity and growth plans. What works for a sole trader consultant might not suit a product-based business with inventory.

How to Prepare for MTD

Even if you’re not required to comply yet, early preparation will make the transition much smoother.

Steps to Take Now

1. Understand your timeline

Calculate your qualifying income and work out when you’ll need to comply. If you’re anywhere near the thresholds, it’s worth preparing sooner rather than later.

2. Tidy up your existing records

Before moving to digital systems, get your current records in order. This might mean catching up on expenses, reconciling bank statements, or sorting through those receipts you’ve been meaning to organise.

3. Research and choose software

Don’t leave this until the last minute. Take time to trial different options (many offer free trials) and choose one that feels right for your business.

4. Set up your system

Once you’ve chosen software:

• Create your account and set up your business details
• Connect your bank feed
• Input any opening balances or historical data
• Set up your income and expense categories
• Learn how to create invoices and record expenses

5. Build good habits

The beauty of digital record-keeping is that it works best when you stay on top of it. Set aside time each week to:

• Upload receipts or invoices
• Reconcile bank transactions
• Review your financial position

6. Sign up with HMRC

When you’re ready (and before you’re required to), sign up for MTD through your Government Gateway account. HMRC recommends doing this well before your compliance date.

7. Get support

Consider working with an accountant, especially in your first year of MTD compliance. They can:

• Help you choose the right software
• Set up your system correctly
• Handle your quarterly submissions
• Ensure you’re claiming all allowable expenses
• Keep you compliant with changing regulations

The Penalties You Need to Know About

HMRC has introduced a points-based penalty system for MTD. Missing quarterly update deadlines or your final declaration can result in penalty points, and repeated delays lead to financial penalties.

The specifics are still evolving, but the message is clear: staying on top of your MTD obligations matters. Good software with reminder features can help ensure you never miss a deadline.

Common Concerns About MTD

“I’m not tech-savvy – will I cope?”

Modern MTD software is designed for business owners, not accountants. Most platforms are intuitive with plenty of help resources. Plus, accountants can handle submissions on your behalf if needed.

“What if my income fluctuates and drops below the threshold?”

Once you’re in the MTD system for a tax year, you need to complete that year’s requirements. However, if your income drops below the threshold in subsequent years, you may not need to continue (though many businesses choose to because they’ve already made the transition).

“Will this cost me more?”

There are costs – software subscriptions and potentially accountant fees. However, many businesses find that better financial visibility actually saves them money through:

• Fewer errors and penalties
• Better cash flow management
• Not missing tax-deductible expenses
• Making more informed business decisions

“Can I still use Excel?”

Not for your primary MTD records. HMRC requires approved software for digital record-keeping and submissions. However, some bridging software exists that can work with spreadsheets to submit the required data to HMRC.

“Do I need to make tax payments quarterly now?”

No. This is a common misconception. While you submit quarterly updates to HMRC, your actual tax payment dates remain unchanged. You still make payments on account in January and July, with any balancing payment by 31st January, just as before. The quarterly updates are simply reports of your income and expenses – not payment deadlines.

The Silver Lining: Benefits of Going Digital

While MTD might feel like extra admin, many business owners discover unexpected benefits:

Real-time financial insight: Know exactly where you stand financially at any time, not just at year-end.

Better cash flow management: See money in and out immediately, making it easier to plan ahead.

Reduced year-end stress: With quarterly updates, there are no nasty surprises when it’s time to file your annual return.

Fewer errors: Digital systems reduce manual data entry mistakes and calculation errors.

Time savings: Once set up, digital systems are often faster than manual bookkeeping.

Professional credibility: Digital invoicing and record-keeping looks more professional to clients and can help when seeking funding.

Tax efficiency: Better records mean you’re less likely to miss allowable expenses or tax reliefs.

What Happens Next?

The Making Tax Digital landscape continues to evolve. The government has indicated that MTD will eventually extend to partnerships and potentially other business structures. Keeping informed about changes ensures you’re never caught off guard.

HMRC typically writes to businesses they expect to be affected, but it’s your responsibility to check your obligations and ensure you’re compliant by the required date.

Getting Started with Confidence

Making Tax Digital might seem daunting, but thousands of UK businesses have already made the transition successfully. The key is starting early, choosing the right tools, and getting support when you need it.

Whether you’re just starting out or approaching an MTD deadline, taking action now will help you stay compliant and in control of your finances.

Need Help Getting MTD-Ready?

At Nava Accountancy, we help growing businesses across the UK navigate Making Tax Digital with confidence. From choosing the right software to handling your quarterly submissions, we’ll make sure you’re set up for success from day one.

We specialise in supporting startups and growing SMEs, providing clear advice and practical support that helps you focus on what matters most – growing your business.

Ready to get started? Get in touch for a free consultation to discuss your MTD requirements and how we can help your business stay compliant while maximising your financial clarity.

Last updated: November 2025. Tax regulations change regularly. Always check the latest guidance on GOV.UK or speak with a qualified accountant for advice specific to your individual situation.