Making Tax Digital – what you need to know (and do)

Tax isn’t an exciting subject, but it’s about to become a pressing one for millions of people.

Radical changes are looming in terms of how people report their tax information – pushing taxpayers into the digital age whether they’re ready (and willing) or not.

Making Tax Digital is a HMRC programme which will require quarterly tax updates from next month onwards.

Its introduction has been delayed several times over recent years, so taxpayers would have been forgiven for assuming it was never going to happen.

However, it does appear the new regime is going ahead from April 2026, and many taxpayers need to start considering software selections and methods of digital record keeping.

Tax does have to be taxing

Making Tax Digital will require an increasing proportion of UK taxpayers to keep digital records, reporting their income and expenses to HMRC via bespoke third party software.

Instead of submitting a self-assessment tax return once a year, affected individuals will now have to file quarterly updates online – plus an end-of-year MTD tax return.

The new rules are complex, but a helpful reference guide can be found on the Low Incomes Tax Reform Group website, where a dedicated MTD resource hub has been created.

In essence, determining whether you’re in scope of the new rules depends on whether you have any income from self-employment or property.

It doesn’t extend to employment income, pension income or any savings/dividend income – or even dividends taken from your own limited company.

Over time, more and more taxpayers will be ensnared in the MTD dragnet, since this new reporting regime is being phased in gradually.

The first tranche of taxpayers affected are those who earned more than £50,000 gross in the 2024/25 tax year, before any expenses.

Thresholds drop to £30,000 of gross income as of April 2027, and eventually those with income of just £20,000 must also comply, or incur penalties.

Record breakers

The biggest change for many taxpayers involves the imposition of digital record keeping.

Gone are the days where a shoebox of receipts was sufficient. Taxpayers must now record income and expenses using software they’ll have to buy themselves.

Unlike the current online self-assessment filing service, HMRC won’t be providing their own Making Tax Digital software.

Individual taxpayers are responsible for sourcing and installing software that suits their circumstances, budget and technical knowhow.

HMRC have a tool on their website to help narrow down these software options, and they say this tool is being updated regularly.

Your choice of software may be influenced by your current level of digital competence, but it’ll require a home broadband connection – which not everyone has.

There is an option to use bridging software, which allows you to transfer data from a spreadsheet (like Microsoft Excel) to HMRC’s system.

At the other end of the spectrum, specialist software providers are marketing sophisticated accounting packages which can link to your bank, streamlining the process.

When choosing software, be wary of free trials and any “low cost” options. Those costs may quickly rise, and not all packages are equally user-friendly or intuitive.

Choosing inappropriate or unnecessarily complex software could become a costly mistake if you want to change provider at a later date, since this may not be easy.

Can’t I opt out of Making Tax Digital?

There are circumstances in which HMRC may grant an exemption. Some are automatic but others need to be applied for, such as if a disability prevents you using tax software.

If you think you may qualify for an exemption, lodge an application now. A list of relevant criteria has been published on the GOV.UK website.

If you’re not exempt, it’s time to invest in some software and then sign up to Making Tax Digital, as HMRC won’t do it on your behalf.

The Revenue claim MTD will reduce errors and save time, but it remains to be seen whether any benefits to the taxpayer outweigh the additional administrative burdens.

With HMRC’s systems barely able to cope with the current self-assessment system, the only winners here may be the software providers themselves.