What is making tax digital?

What is Making Tax Digital? A guide for small businesses

Tax. Just the word can make any small business owner tense. And when terms like ‘Making Tax Digital’ start appearing in emails from HMRC, it can be easy to feel overwhelmed. But despite the name sounding like something buried in technical legislation, the concept is actually quite straightforward and, when approached with the right tools, easily manageable.

Whether you're a sole trader navigating your first year in business or you’ve been running your own limited company for a while, here’s a practical guide to what Making Tax Digital (MTD) means, how it might affect you and how to prepare for the changes it brings.

As always, for anything complex or specific to your situation, it's worth speaking to a qualified tax advisor.

Making Tax Digital explained

MTD is the UK government’s initiative to modernise the tax system by moving away from paper-based processes. It aims to make tax administration more effective and efficient, and so easier for taxpayers to get their taxes right.

In short: less concentrated periods of paperwork, fewer mistakes and a more structured approach to managing your tax affairs. 

The MTD rollout began in April 2019 and is continuing in phases. Over time, more and more businesses – small and large – will be required to comply.

Who needs to follow MTD?

At present, all VAT-registered businesses must follow MTD rules regardless of their turnover. That means if you’re VAT registered, you must use MTD-compatible software to maintain your digital records and submit your VAT returns.

From April 2026, MTD for Income Tax Self Assessment (ITSA) will apply if you have a gross income over £50,000 from self-employment or as a property landlord. In April 2027, the threshold will drop to £30,000. Then in April 2028, it will drop again to £20,000.

Here’s the GOV.UK source for more info.

How does MTD work?

Here are some of the main MTD requirements:

• Digital record keeping – You must keep income and expense records in a digital format. Spreadsheets can only be used if they’re digitally linked to MTD-compatible software. Manual data copying or cut-and-paste methods aren’t allowed.
• MTD-compatible software – Your records need to be submitted through HMRC-recognised software. This software must be capable of maintaining records, preparing returns and communicating with HMRC’s system.
• Quarterly updates – If you fall under MTD for Income Tax, you’ll need to submit quarterly income and expense summaries within one month of each quarter’s end. For example:
• 7 August for April to June (Q2)
• 7 November for July to September (Q3)
• 7 February for October to December (Q4)
• 7 May for January to March (Q1)

After the four quarterly updates, you’ll also submit a final end-of-period statement and a declaration to finalise your tax.

This is a shift in rhythm for many sole traders and landlords. But with a bit of planning – and the right software – it becomes far more manageable than it first looks.

What software do you need for MTD?

To comply with MTD, you’ll need software that HMRC recognises. There’s a regularly updated list of approved MTD software on GOV.UK, and it’s worth checking this directly rather than relying on third-party summaries.

A key point to stress: using a spreadsheet alone is not enough. You must have a digital link between your spreadsheet and the software submitting your tax returns. That might involve bridging software or integrated solutions.

For instance, Zempler Bank’s Making Tax Digital (MTD) tool lets you complete and submit your VAT returns directly from your business account for free. MTD-compliant software keeps everything organised digitally, so you can kiss goodbye to paperwork.

Can you get an exemption?

Potentially. While MTD will become mandatory for most businesses that meet the requirements, there are exemptions in place for those who:

• Can’t use digital tools because of age, disability or location
• Object to using technology on religious grounds
• Are already exempt from online tax returns

You’ll need to apply to HMRC for an exemption and approval isn’t guaranteed. But if you believe you fall into one of these categories, it’s worth exploring early – ideally before your first deadline. Find out if you’re exempt.

How Zempler Bank can help

We’ve built every Zempler Bank feature with small business owners and sole traders in mind.

By opening a Zempler Bank business account, you can eliminate paperwork, monitor expenses in real time and enjoy transparent pricing - freeing up your time to focus on growing your business.
With our app, you’ll receive real-time notifications and access built-in cash flow insights, helping you stay financially aware long before tax season arrives.

Final thoughts

Making Tax Digital doesn’t have to be complicated, especially with the right tools and support behind you. While the shift to digital record-keeping and quarterly submissions may feel like a big change, it’s ultimately designed to make life easier for business owners by reducing paperwork, cutting down on errors, and improving visibility over your finances.

If you’re running a small business or working as a sole trader, now is the time to get ahead. Choosing MTD-compatible software and setting up good habits early can save you stress later, particularly as more rules come into effect over the next few years.

Need more help? Speak to a qualified accountant or tax adviser to make sure you’re fully compliant and ready for what’s ahead.

Please note, the content in this article is not guidance from Zempler Bank and was created in whole or in part using GenAI. It may contain errors or inaccuracies and should not be relied upon as a substitute for professional advice. Zempler Bank makes no representations or warranties of any kind, explicit or implied with respect to the contents of this article. Without limitation, Zempler Bank specifically excludes and disclaims all express or implied warranties and conditions to the extent permitted by law, and any action taken using such content is strictly at the user’s risk.