Making Tax Digital (MTD)

What is Making Tax Digital?

Making Tax Digital (MTD) is HMRC’s programme to require businesses and individuals to keep digital tax records and submit returns via HMRC-approved software. The goal is to reduce errors in the UK tax system and bring tax reporting closer to real-time.

MTD is not optional for those within scope. Using non-compliant software or missing a quarterly submission triggers penalties.

The two phases — VAT and Income Tax

MTD for VAT (live since April 2022)

All VAT-registered businesses must use MTD-compatible software to submit VAT returns. If you are VAT-registered and not already doing this, you are non-compliant. HMRC’s MTD for VAT list: gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-vat.

MTD for Income Tax (rolling out 2026-2028)

This is the more significant change for self-employed individuals and landlords. It requires quarterly digital submissions to HMRC instead of one annual Self Assessment return. The phased rollout:

April 2026: Mandatory for self-employed individuals and landlords with qualifying income above £50,000
April 2027: Mandatory for those with qualifying income above £30,000
April 2028: Mandatory for those with qualifying income above £20,000 (subject to legislative confirmation)

Source: HMRC guidance — gov.uk/guidance/check-if-youll-need-to-sign-up-for-making-tax-digital-for-income-tax

What “qualifying income” means

Qualifying income includes self-employment income plus property income. If you have a £35,000 side business and £20,000 in rental income, your total qualifying income is £55,000 — above the April 2026 threshold.

What MTD for Income Tax requires

Digital records: Keep records of income and expenses in MTD-compatible software (not spreadsheets alone).
Quarterly updates: Submit four quarterly updates per tax year to HMRC through the software.
End of period statement (EOPS): Confirm your figures at the end of the tax year.
Final declaration: Replaces the Self Assessment return.

Critically, the quarterly updates are summaries, not full returns. They report your income and expenses for that quarter. Your accountant or you can still review and adjust at EOPS.

Which software is MTD for Income Tax compatible?

HMRC maintains an official compatibility list. As of 2026-05-19, verified MTD for IT compatible software includes: FreeAgent, Xero, QuickBooks Online (not Self-Employed), and Sage Business Cloud. The full list is at gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-income-tax.

FreshBooks is not on this list as of 2026-05-19. Wave is not on this list. Bonsai is not on this list. UK sole traders above the threshold should verify any software’s current MTD status before committing.

The FreeAgent insight

FreeAgent is available free with a NatWest, RBS, or Mettle business current account. It is MTD for Income Tax compatible. For a UK sole trader earning £30K-£80K who banks with NatWest, this makes FreeAgent the correct year-1 answer: MTD-compliant, £0 cost, backed by a major clearing bank.

FreeAgent pricing at retail (without Mettle): £19/mo + VAT. If you do not bank with NatWest/RBS/Mettle, switching banks to access the free product is worth considering — Mettle is a digital business account with no monthly fees.

Sources: gov.uk/guidance/check-if-youll-need-to-sign-up-for-making-tax-digital-for-income-tax; mettle.co.uk/business-banking/free-accounting-software; gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-income-tax