The benefits of early adoption of MTD for ITSA: A guide for forward-thinking businesses

Making Tax Digital (MTD) is an initiative by HMRC aimed at digitising the tax system. 

MTD is already in force for value-added tax (VAT) returns. Next up, it’ll convert the income tax self-assessment (ITSA), which affects self-employed individuals (sole traders) and landlords, to a digital system. 

While MTD for ITSA was postponed multiple times, ultimately being held up until April 6th 2026, it’s now all systems go. 

By taking proactive steps to prepare for MTD for ITSA now, you can position yourself as ready for this policy and the changes it brings to your tax returns.

This guide explores the advantages of adopting MTD for ITSA ahead of the deadline. 

Understanding MTD for ITSA

MTD for self-assessment requires self-employed individuals and landlords to keep digital records. 

If you fall into these categories, you’ll have to provide HMRC with quarterly updates on your income and expenditure using MTD-compatible software. 

Background and context

The UK government is keen to move away from clunky end-of-year filing to a smoother, more continuous model. Rather than people rushing to get their accounts together for one singular deadline, they input their income into software that directly communicates with HMRC. 

In essence, the traditional paper-based system is being phased out in favour of real-time, digital record-keeping and reporting. 

Here are the key dates for MTD:

• April 2026: Businesses and individuals with annual income exceeding £50,000 will be required to start using MTD-compliant methods for their income tax records and returns.
• April 2027: This requirement will extend to those with annual incomes above £30,000.

Businesses and individuals should view these dates as the final deadlines for compliance – it’s strongly advised you transition in good time and get used to the new processes. 

What forms of income does MTD apply to?

For self-assessment, MTD applies to sole traders and landlords. It doesn’t currently apply to everyone who uses the self-assessment system (e.g. company directors). 

Self-employed income

If you’re self-employed and registered as a sole trader, MTD introduces a new way of managing your finances. 

Instead of the usual annual tax return, you’ll use digital record-keeping tools like Xero and use them to deliver quarterly updates – more on these software tools shortly. 

Rental Income

Landlords will have to keep track of their rental income and expenses digitally and update HMRC every quarter. The process is virtually the same as for sole traders. 

How do you become MTD compliant?

So, how do you actually become MTD compliant? Firstly, you need to use MTD-compatible software, such as Xero, Sage, Freshbooks, or Quickbooks. 

This software is essential for maintaining digital records and submitting quarterly updates to HMRC. 

Here’s a step-by-step guide on how to become MTD compliant:

1. Choose MTD-compatible software: The first step is to select software compatible with MTD for ITSA. This software should enable you to create and store digital records of your business transactions, send updates of your business income and expenses every three months, and confirm end-of-period statements. HMRC provides a list of compatible software on its website.
2. Set up your software: Once you have chosen your software, you’ll need to set it up by entering your Government Gateway user ID and password. This will authorise your software to interact with HMRC’s systems.
3. Keep digital records: Use your software to record all your business income and expenses. If you have more than one business, such as being a landlord and having another trade, you must keep separate records and make separate submissions for each business.
4. Send quarterly updates: Every three months, your software will compile your digital records to create totals for each income and expense category. These summaries, known as quarterly updates, must be sent to HMRC.
5. End of Period Statement (EOPS) by 31 January: Following the end of the tax year, an EOPS must be submitted to HMRC via software by 31 January. This statement should include details of your property income and allowable expenses. If you have multiple businesses, you’ll need to file an EOPS for each business, adhering to the end of each business’s accounting period but ensuring submission by 31 January at the latest.
6. Final declaration by 31 January: Additionally, you’ll need to include a final declaration of all your income, which also must be submitted through your software.
7. Tax and National Insurance payments by 31 January: The balance of any tax and National Insurance contributions due must be paid by 31 January. Remember, the payment on account system is still in place, so you might also need to make an additional payment by 31 July of the same year.

Why adopt MTD-compliant processes now?

The primary benefit of early adoption of MTD is having your processes ready to roll ahead of the deadline. 

By preparing early, businesses can ensure they are fully compliant, thus avoiding the stress and potential penalties associated with last-minute adjustments.

Here’s why you should consider adopting MTD now:

• Avoid penalties: By adapting to MTD for ITSA ahead of the mandatory deadlines, you can ensure that they meet all regulatory requirements, thus issues down the line. 
• Reducing stress: Don’t rush the transition to MTD – early adoption will let you gradually adapt to the new system and resolve teething problems with the software and processes.
• Streamlined processes: MTD for ITSA is designed to make tax reporting more efficient by digitising the process. By adopting these systems early, you can start to streamline your processes and investigate the various tools accounting software offers. Top benefits include faster data entry, automated calculations, and easier access to financial records. 

• Error reduction: Manual processes are often prone to errors, which can be costly in time and money. Using digital tools for tax reporting minimises the chances of such errors. Digital record-keeping helps ensure the accuracy of your tax returns.
• Improved financial visibility: Digital systems provide real-time financial data for better visibility into the business’s financial status. This can be crucial for decision-making, as businesses have access to up-to-date information on their income, expenses, and overall financial health.
• Enhanced planning and budgeting: Businesses can plan and budget more effectively with regular and accurate financial data. MTD for ITSA requires quarterly updates, which means businesses have a more frequent overview of their financial position, aiding in more accurate forecasting and budgeting.
• Quarterly insights for agile decision-making: With MTD, you don’t need to wait until the end of the year for a financial health check. Quarterly reporting provides you with ongoing insights, allowing you to quickly identify trends, address issues, and seize opportunities. This keeps your business agile and responsive to market dynamics.
• Collaborate effectively with financial advisors: The digital nature of MTD makes it easier to collaborate with your financial advisors and accountants. 

What software to choose for MTD?

Software is the linchpin of MTD. You’ll need to use software to submit your information to HMRC. 

The software must be ‘Making Tax Digital compliant’, and there are several compatible accounting programs available now. The most popular MTD-compliant software options currently include:

Xero

Founded in 2006, Xero has transformed the world of accounting with its innovative cloud-based software. It rapidly gained popularity and now serves millions of subscribers globally. It’s probably fair to say Xero has set a new gold standard in modern accounting software.

• Detailed financial reporting: Xero offers advanced reporting features, including profitability reports, balance sheets, and cash flow statements. These reports can be customised to fit specific business needs.
• Automated features: Xero automates many routine tasks like transaction categorisation and reconciliation, which helps in reducing manual errors and saving time.
• Multi-currency support: Xero is well-suited for businesses that operate internationally, offering multi-currency support. This feature allows businesses to manage transactions in various currencies and see real-time currency exchange rates.
• Accessibility and collaboration: It provides cloud-based access, meaning financial data can be accessed from anywhere. Xero also allows for easy collaboration with accountants and team members.

QuickBooks

QuickBooks, developed by Intuit, is a leading accounting software widely embraced by small and medium-sized businesses. It’s well-known for its robust financial tools and user-friendly design. 

• Comprehensive dashboard: QuickBooks provides a comprehensive dashboard that overviews a business’s financial health, including outstanding invoices, expenses, and sales.
• Custom invoice creation: It offers customisable invoice templates, making it easier for businesses to create and send professional-looking invoices.
• Expense tracking: QuickBooks has a robust expense tracking feature, which allows businesses to connect bank accounts and credit cards for automatic expense categorisation.
• Cash flow management: The software includes a cash flow management tool, which helps track and forecast cash flow up to 90 days in advance.

Sage

Sage will be a familiar name to many and has been around since the 1980s.

It caters to a wide range of businesses, from small start-ups to large enterprises, offering extensive features. Sage is a veteran accounting software with extended functionality. 

• Flexibility and scalability: Sage is highly scalable, catering to businesses of all sizes, from start-ups to large enterprises.
• Advanced inventory management: For businesses that require inventory management, Sage offers detailed tracking of stock levels, orders, and sales.
• Integrated payroll solutions: Sage provides integrated payroll solutions, making it easier to manage employee payments, tax deductions, and compliance.
• Business insights: It offers valuable business insights through detailed analytics and reports, helping in strategic decision-making.

FreshBooks

FreshBooks started as a small, client-focused invoicing solution and has evolved into a comprehensive accounting tool tailored for freelancers and small businesses. It’s ideal for self-employed freelancers. 

• Simple invoicing: FreshBooks is known for its straightforward invoicing, which is particularly user-friendly for freelancers and small businesses.
• Expense management: It allows easy tracking of expenses by connecting to bank accounts or through manual entry, helping in budgeting and tax preparation.
• Time tracking integration: FreshBooks offers integrated time tracking, which benefits service-based businesses that bill clients based on hours worked.
• Client management tools: The platform includes client management tools that help manage client information and keep track of client account histories.

Summing up

The roll-out of MTD for self-assessment taxpayers and landlords is undeniably a big change. 

Starting in April 2026, tax returns will move from the traditional annual tax returns to a quarterly, digital-first approach. While it’s not reinventing the entire process, it does represent a different workflow to what millions of people are used to.

With MTD for ITSA, how people record and report our taxes will change, but it’s also an opportunity to improve accounting processes and, perhaps best of all, finally stop the end-of-year tax return panic. 

Adopting MTD as soon as possible is a smart move. There’s little reason for delay – by getting it set up and ready to go, you won’t need to do anything by the time the April 2026 deadline comes around.