Making Tax Digital for Income Tax (MTD for IT) will be one of the most profound changes to the UK’s tax system when it comes into effect from April 2026. While Phase 1 will only impact firms with a turnover of over £50,000, by the time Phase 3 is rolled out (timings still TBC), it will be extended to any small business or sole trader earning over £20,000 annually.
Set to shake up the financial reporting requirements for 2.7 million small businesses, MTD for IT will increase tax reporting and compliance requirements throughout the year. Under the new regime, small businesses will need to provide quarterly digital updates on business income and expenses using MTD compatible software, along with a final declaration at the end of the year. On top of this, small businesses will initially have two tax years active and in progress at the same time, with the last non-MTD return and the new quarterly reporting under MTD overlapping.
Easing the transition to compliance
For the smallest businesses that are already juggling so much, staying compliant with the changing tax requirements will be another thing to think about. And for some, MTD for IT will also mean investing in digital software for the first time. Currently, over two-fifths (42%) of the smallest businesses don’t use any finance or accounting tools and just 27% of businesses believe they get their tech and software choices right. This can result in costly mistakes and lost time so my number one piece of advice is to start preparing as early as possible.
Now is the time to start putting the right processes in place so that when MTD for IT does come into force there is minimal disruption to the day-to-day running of your business. For example, adopting HMRC recognised software which is MTD compatible for digital record keeping will help you adopt new digitally-led habits that are crucial to helping you comply with the new financial reporting requirements. Engaging with an accountant or bookkeeper can also help you better understand the changing nature of compliance requirements under MTD for IT.
Even though it might seem a long way off, the deadline will be just around the corner very soon, and you don’t want to be scrambling to catch up.
How MTD will accelerate your business
Getting ready for MTD for IT now will also help to unlock several benefits:
- Better understanding of their financial position: clear, transparent and regular reporting will empower your small business to make better business decisions. With a real-time view of finances, you can gain a more accurate forecast of cash flow and plan more effectively about where to invest, for example, in new hires or technology.
- Streamlined processes: as you start to move towards digital record keeping for compliance, there will be opportunities to reduce manual processes and realise other efficiency gains. Our research shows that those small businesses which have digitalised have found their business runs more efficiently (38%), experienced reduced costs (32%) and had better control of finances (27%). For example, digital invoices can be payment-enabled enabling customers to pay their bills in just a few simple clicks. That means faster payments, healthier cash flow, and less time spent chasing invoices. While digital records help spread business admin across the year, meaning owners will avoid last minute scrambles to consolidate physical invoices and receipts with their accountants in the run up to tax deadlines.
- Better relationship with accountant and bookkeepers: small businesses that engage with an accountant or bookkeeper on MTD for IT may gain access to additional advisory support on growth strategies or long-term planning. Auditing and compliance will also be simplified, with their accounting software producing financial statements and tax returns with data linked to the digital records.
This is just the start
Businesses of all sizes and revenue need to start planning for these significant changes to the UK tax system. While 2026 affects businesses earning over £50,000, in 2027 it will include those earning over £30,000. Likewise, an additional 940,0000 landlords and sole traders earning over £20,000 will be affected by the change in the future. Taking the time now to find the right technology and advisors will only pay dividends in the future and avoid an expensive last-minute dash.
