Preparing for Making Tax Digital in 2026: What U.K. businesses should know

Making Tax Digital (MTD) is a U.K. government initiative designed to modernise the U.K. tax system. It replaces traditional, paper-based processes with digital recordkeeping and reporting, and requires businesses to use MTD-compatible software. The U.K. government’s goal is to reduce tax errors and simplify tax compliance for businesses and tax authorities alike.

While MTD for VAT has been live for some time, significant changes are coming in 2026. Here’s what you need to know and how to prepare.

• From April 2026, businesses with annual gross income over £50,000 must comply with Making Tax Digital for Income Tax.
• MTD replaces annual tax returns with digital recordkeeping and quarterly submissions — using HMRC-compatible software is mandatory.
• Now is the time to prepare: review your income sources, assess software readiness, and update internal processes to meet MTD requirements with confidence.

The rollout of MTD for Income Tax Self Assessment (ITSA) will happen in several key stages. Businesses and individuals should be aware of these milestones to ensure they’re ready to comply with new requirements:

6 April 2026: MTD for ITSA becomes mandatory for businesses (including partnerships and landlords) earning over £50,000 in total gross income from self-employment and/or property.

6 April 2027: The income threshold lowers to £30,000, bringing many medium-sized businesses into scope — especially those with multiple revenue streams across trading and property.

7 August 2026: First quarterly update deadline for the 2026–27 tax year.

31 January 2027: Final Self Assessment filing under the old system (for the 2025–26 tax year).

April 2028 and beyond: HMRC may expand MTD further to businesses with gross income over £20,000 and certain types of partnerships.

Medium-sized businesses, which typically have a growing workforce, multiple service lines, and are trading across borders, will need to rethink how they handle compliance.

Digital recordkeeping is no longer optional

Every income stream, including trading revenue, rental income, or service fees, must be recorded digitally. Businesses can no longer rely on paper-based books or disjointed spreadsheet systems unless they are linked to approved bridging tools.

Quarterly digital submissions

Instead of one annual Self Assessment return, businesses must now submit income and expense summaries every quarter, plus a final year-end declaration. That means year-round accuracy is critical. For medium-sized businesses with finance teams or external accountants, processes will need to be adapted to this new cadence.

Check whether you fall into the new thresholds

Review your business’s income for the 2024/25 tax year. If it exceeds £50,000, you’re in scope from April 2026. For those earning over £30,000, the requirement starts in April 2027.

Move to HMRC-recognised MTD software

Medium-sized businesses should ensure that their accounting or ERP platforms support MTD compliance. HMRC-recognised software can help consolidate multiple income streams, automate calculations, and submit data directly to HMRC.

Start transitioning records to digital formats

Even before it becomes mandatory, practise managing digital records and simulate quarterly updates. This will make the real transition smoother.

Train teams on new processes and quarterly updates

Ensure your team or accountant understands the updated requirements, timelines, and responsibilities. Everyone involved in tax preparation should be ready for the switch to quarterly reporting.

Run internal readiness assessments now

Perform a gap analysis of your current tax processes, software, and skills. Identify where changes are needed and create a roadmap to achieve compliance before 2026.

• Delaying preparation: The transition to digital and quarterly submissions takes time. Waiting until 2026 could lead to penalties or rushed decisions.
• Relying solely on spreadsheets: Traditional spreadsheets may not meet MTD standards unless supported by bridging software.
• Incorrect income calculations: Thresholds are based on gross income, not profit. Ensure you accurately calculate qualifying income.
• Missed deadlines: MTD uses a points-based penalty system for late submissions. Frequent delays can lead to financial penalties.
• Inadequate separation of income sources: You must maintain separate digital records for each income stream (e.g., self-employment vs. property).

Medium‑sized businesses deal with higher transaction volumes, multiple revenue streams, and increasing compliance pressure. Manual tax processes simply don’t scale. Automation helps reduce time spent on repetitive tax tasks, improves accuracy across records and submissions, and supports consistent, on‑time compliance as reporting demands increase.

Preparing early for MTD puts your business in control. With the right automation in place, MTD becomes less about meeting obligations and more about gaining visibility, consistency, and confidence in your tax processes.

Avalara helps medium‑sized businesses streamline MTD readiness with real‑time tax calculation and regulatory updates, and centralised digital recordkeeping and reporting. Avalara solutions also integrate with the accounting and ERP platforms you already use, allowing finance teams to focus on higher‑value work while maintaining confidence that tax compliance is handled accurately and efficiently.

Whether you’re managing domestic operations or expanding globally, Avalara can help medium-sized businesses stay MTD-ready. Contact Avalara today and speak with us about helping your business navigate the challenges of MTD.

What is Making Tax Digital (MTD)?

Making Tax Digital is a UK government initiative to modernise the tax system by requiring businesses to keep digital records and submit tax information electronically. For medium-sized businesses, this means shifting from annual manual filings to structured, quarterly digital updates using HMRC-recognised software. MTD aims to reduce tax errors, improve reporting accuracy, and streamline compliance across increasingly complex business operations.

Who needs to comply with MTD in 2026?

From 6 April 2026, MTD for Income Tax Self Assessment (ITSA) will apply to businesses —including partnerships and landlords — whose total annual gross income from self-employment and/or property exceeds £50,000. This includes many medium-sized firms with diversified income sources. In April 2027, the threshold drops to £30,000, capturing even more organisations. Businesses above these thresholds must adopt digital recordkeeping and submit quarterly updates via MTD-compatible software. 

Does MTD affect VAT-registered businesses?

Yes. MTD for VAT is already in effect for all VAT-registered businesses. Since April 2022, every VAT-registered business — regardless of turnover — must keep digital records and submit VAT returns using MTD-compliant software. For medium-sized businesses already managing VAT digitally, MTD for Income Tax is a natural next step that will require extending digital systems to other areas of tax compliance.

What software do I need for Making Tax Digital?

Businesses will need HMRC-recognised software that supports MTD functions, including digital recordkeeping, quarterly updates, and final declarations. The software should integrate with your accounting or ERP system and be capable of managing multiple revenue streams and reporting obligations. Many businesses benefit from using cloud-based platforms or automation tools that can scale with business growth and complexity.

What happens if I don’t comply with MTD requirements?

Noncompliance — such as missing quarterly deadlines, using unapproved software, or submitting inaccurate data — can trigger HMRC’s points-based penalty system. Accruing penalty points may result in financial penalties, which can escalate quickly for businesses with multiple reporting responsibilities. To avoid risks and maintain continuity, timely preparation and accurate reporting are critical.