Making Tax Digital (MTD) is a government initiative for digital tax submissions that’s reshaping how UK businesses report and manage tax. What started as a government initiative to modernize value-added tax (VAT) filing is expanding to income tax, which affects millions of sole traders, landlords, and VAT-registered businesses across the country.

In the 2023–2024 tax year, the UK had an estimated tax gap (the difference between what should’ve been paid in tax versus what was actually collected) of £46.8 billion. That’s 5.3% of total tax liabilities. A large portion of this gap is estimated to be due to errors or preventable mistakes, which MTD is intended to reduce.

Below, we’ll discuss what MTD for income tax means for sole traders and landlords, what MTD requires of UK businesses, and how to choose MTD-compatible software that supports compliance and long-term growth.

What’s in this article?

• What is Making Tax Digital in the UK?
  
• When does Making Tax Digital apply to my business?
  
• How does Making Tax Digital for VAT work?
  
• How will Making Tax Digital for income tax affect sole traders and landlords?
  
• What do UK businesses need to do to comply with Making Tax Digital?
  
• Why is HMRC making tax digital?
  
• How can UK businesses choose MTD-compatible software that supports compliance and growth?
  
• How Stripe Tax can help
  

What is Making Tax Digital in the UK?

MTD is the UK government’s long-running program to digitize tax reporting. It requires businesses and individuals to keep digital tax records and submit returns to His Majesty’s Revenue and Customs (HMRC) using MTD-compatible software.

When does Making Tax Digital apply to my business?

Whether and when MTD applies to your business depends on your VAT status, income level, and business structure. Here’s what to know.

VAT-registered businesses

MTD applies to all VAT-registered businesses, including those below the £90,000 VAT threshold that registered voluntarily.

Sole traders

MTD income limits for sole traders are being phased in gradually. The threshold is based on gross income, not profit.

Here’s the timeline:

• April 2026: Businesses, self-employed individuals, and landlords that earn more than £50,000 annually must follow MTD for income tax.

• April 2027: The requirement expands to those that earn above £30,000 annually.

• April 2028: The program will include sole traders and landlords with qualifying incomes above £20,000, which widens the scope substantially across smaller self-employed businesses and property owners.

Landlords

If your rental income, combined with any self-employed income, exceeds the relevant sole trader threshold in your phase-in year, you’ll be subject to MTD for income tax.

General partnerships

The government has confirmed that general partnerships will be brought into MTD for income tax at a later date, but the exact start date hasn’t been finalized yet.

Limited companies

MTD doesn’t currently apply to corporation tax. While digitization of corporation tax has been discussed, there’s no confirmed implementation timeline.

How does Making Tax Digital for VAT work?

MTD for VAT is the first fully implemented phase of the program. It’s already standard practice for VAT-registered businesses.

Here’s what MTD requires.

Digital VAT records

You must keep specific VAT information in digital form, including sales and purchase details, VAT charged and reclaimed, your VAT registration number, and any scheme adjustments. These records need to be stored electronically in accounting software or a compliant digital system, not reconstructed manually at the end of the quarter.

Functional, compatible software

You can no longer manually type VAT figures into the government portal if you’re subject to MTD; instead, you use your accounting platform. Your VAT return must be submitted through HMRC-recognized software that connects directly to HMRC’s systems.

Digital links between systems

If you use multiple components (e.g., a spreadsheet and accounting software), the data must move between them digitally. Copying and pasting totals or manually re-entering numbers breaks the digital audit trail and isn’t compliant.

Unchanged VAT deadlines

Filing frequencies and payment deadlines remain the same. Many businesses still file quarterly and pay VAT one month and seven days after the end of the VAT period; MTD changes only the submission method.

Corrections and adjustments

Errors within HMRC’s adjustment limits can be corrected in your next VAT return through your software. Larger errors require formal disclosure, but the corrections still need to be reflected in your digital records.

Penalties and compliance monitoring

HMRC has a points-based penalty system for late VAT submissions. Each missed deadline earns a point, and financial penalties apply once a certain number of points is reached. This makes consistent, on-time digital filing important. (Taxpayers who need to begin using MTD from April 2026 will not receive penalty points for late quarterly updates for the first 12 months, but penalty points will still apply for late tax returns.)

How will Making Tax Digital for income tax affect sole traders and landlords?

MTD for income tax changes the rhythm of Self Assessment. Instead of filing one annual return, eligible sole traders and landlords will report income and expenses throughout the year using digital software.

You’ll submit four updates per year that summarize your business or rental income and expenses; these are cumulative figures sent through MTD-compatible software, and they give HMRC a regular view of your activity. If you run more than one sole trade business or receive rental income, you must submit an End of Period Statement (EOPS) quarterly for each qualifying income stream. The software should distinguish and report income streams individually.

After the tax year ends, you’ll finalize your accounting adjustments, such as capital allowances and relief claims, through an EOPS. This fills the role of the annual return in year-end reconciliation. You’ll still have to confirm your total taxable income and complete a final declaration by January 31 in the following tax year; this step coalesces everything and triggers the final tax calculation, similar to the current Self Assessment submission.

All income and allowable expenses must be recorded throughout the year. Your software must be able to submit updates directly to HMRC via its MTD application programming interface (API).

Individuals who cannot reasonably use digital tools due to age, disability, or remoteness can apply for exemption, but generally, sole traders and landlords above the threshold will be expected to comply.

What do UK businesses need to do to comply with Making Tax Digital?

The fundamentals of VAT and income tax compliance are the same: UK businesses should keep records in accounting software or another compliant digital system and use functional, compatible software to submit returns and updates on the current timeline. All filing deadlines remain the same, and VAT records must still be kept for at least six years. Like VAT-registered businesses, all UK businesses that fall under MTD should maintain digital links if they use more than one system (e.g., a point-of-sale tool and separate accounting software).

While VAT-registered businesses are automatically signed up for MTD, sole traders will need to sign up when their phase begins. Enrollment ensures your software is authorized to submit updates on your behalf. Since MTD is being introduced in phases, and income thresholds and timelines have been known to shift, track official HMRC guidance as your business grows.

Why is HMRC making tax digital?

HMRC’s goal is to reduce errors, narrow the tax gap, and modernize how tax data moves between businesses and government. MTD is expected to yield the following benefits.

Reduction of the tax gap

According to HMRC, a substantial portion of the UK’s tax gap is the result of avoidable errors in recordkeeping and reporting. Digital systems are designed to minimize those errors at the source. When data flows directly from accounting software to HMRC via an API, there’s less manual reentry and fewer transcription errors. That software’s automated calculations help reduce arithmetic mistakes and improve consistency.

Real-time visibility

Annual reporting means HMRC often sees financial information long after transactions occur. Quarterly digital updates provide more current data, which gives both HMRC and taxpayers a clearer picture of liabilities throughout the year.

Improved recordkeeping habits

Digital recordkeeping encourages businesses to maintain up-to-date books rather than reconstruct figures months later. This helps strengthen financial management and reduce last-minute filing pressure.

Increased system efficiency

A digital-first system allows HMRC to consolidate processing, minimize manual intervention, and standardize how tax data is submitted. Over time, this lowers administrative friction on both sides.

Long-term tax modernization

MTD is part of a broader strategy to modernize the UK tax system to fit with how businesses already operate, through digital components, cloud systems, and integrated financial platforms.

How can UK businesses choose MTD-compatible software that supports compliance and growth?

The right system should make filing straightforward while strengthening your business's day-to-day money management. Take the following steps to assess the suitability of your chosen software:

• Confirm HMRC compatibility: The software must be recognized by HMRC for the specific tax you’re reporting, whether that’s VAT, income tax, or both. Without API connectivity to HMRC’s systems, it won’t meet MTD requirements. Use HMRC’s software finder tool to confirm compatibility.

• Prioritize digital record integrity: The system should capture and store transaction-level data to support full digital audit trails. It should minimize manual reentry and establish digital links between tools.

• Look for strong integrations: Your accounting platform should connect easily with the systems you already use, including payments infrastructure like Stripe Payments. When Stripe payment data flows automatically into your accounting software, it reduces reconciliation work and strengthens the accuracy of your digital records.

• Consider a cloud-based option: Cloud systems update automatically when tax rules change and allow real-time collaboration with finance teams or advisers. That flexibility becomes more important as MTD expands.

• Balance simplicity with flexibility: The software should match your current complexity but also support growth, whether that means higher transaction volumes, multiple income streams, or cross-border operations.

• Evaluate reporting and insight features: Beyond compliance, strong reporting tools give you visibility into cash flow, margins, VAT liabilities, and tax forecasts. That visibility turns digital compliance into a major advantage.

• Consider long-term sustainability: Switching systems later can be disruptive. Choosing a stable, well-supported platform reduces risk as MTD requirements develop.

How Stripe Tax can help

Stripe Tax reduces the complexity of tax compliance so you can focus on growing your business. Stripe Tax helps you monitor your obligations and alerts you when you exceed a sales tax registration threshold based on your Stripe transactions. In addition, it automatically calculates and collects sales tax, VAT, and goods and services tax (GST) on both physical and digital goods and services—in all US states and in more than 100 countries.

Start collecting taxes globally by adding a single line of code to your existing integration, clicking a button in the Dashboard, or using our powerful API.

Stripe Tax can help you:

• Understand where to register and collect taxes: See where you need to collect taxes based on your Stripe transactions. After you register, switch on tax collection in a new state or country in seconds. You can start collecting taxes by adding one line of code to your existing Stripe integration or add tax collection with the click of a button in the Stripe Dashboard.

• Register to pay tax: Let Stripe manage your global tax registrations and benefit from a simplified process that prefills application details—saving you time and simplifying compliance with local regulations.

• Automatically collect tax: Stripe Tax calculates and collects the right amount of tax owed, no matter what or where you sell. It supports hundreds of products and services and is up-to-date on tax rules and rate changes.

• Simplify filing: Stripe Tax seamlessly integrates with filing partners, so your global filings are accurate and timely. Let our partners manage your filings so you can focus on growing your business.

Learn more about Stripe Tax, or get started today.