The Future of Making Tax Digital Explained

For a self-employed driver, a CIS subcontractor or a landlord, the future of Making Tax Digital is not really about becoming a bookkeeper overnight. It is about avoiding a last-minute scramble when an HMRC deadline arrives. The people who find the change easiest are usually not the ones with the fanciest software. They are the ones who have a simple routine for recording income, keeping receipts and checking the figures throughout the year.

Making Tax Digital, often shortened to MTD, is already familiar to many VAT-registered businesses. Its next major phase changes the way many sole traders and landlords report income tax. That means more regular updates to HMRC, digital record keeping and a clearer picture of your tax position before the usual January rush.

Where Making Tax Digital stands now

MTD for VAT has been in place for several years. Businesses within its scope must keep VAT records digitally and submit VAT returns using compatible software. For many firms, it has become part of normal admin, although it still catches people out when they rely on handwritten notes, disconnected spreadsheets or receipts in the glovebox.

Making Tax Digital for Income Tax is the bigger change for self-employed people and landlords. From 6 April 2026, it applies to individuals with qualifying income above £50,000. From April 2027, the threshold is due to reduce to more than £30,000.

Qualifying income generally means gross income from self-employment and property before expenses are deducted. So a landlord with substantial rental income, or a sole trader with healthy turnover but modest profit, should not judge their position by looking only at what is left after costs. If you have more than one trade or receive both rental and self-employed income, those amounts may need to be considered together.

The Government has indicated that MTD will eventually be extended further, including to those with qualifying income above £20,000. However, the precise timetable and requirements for groups outside the confirmed phases can change. Limited companies and partnerships should also avoid assuming that their own MTD arrangements will mirror those for sole traders. The direction of travel is digital, but the rules and start dates need checking against your own circumstances.

The future of Making Tax Digital means regular habits

Under MTD for Income Tax, affected taxpayers will keep digital records and send quarterly updates for each relevant business or property source. These updates are not four extra tax bills. They are a way of reporting income and expenses more frequently, giving HMRC and the taxpayer a more current view of the year.

After the tax year ends, there will be an end-of-period process to finalise the business or property figures, followed by a final declaration covering all income sources and claims. This takes the place of the familiar annual Self Assessment return for income within MTD.

The practical shift is significant. Instead of working through a carrier bag of receipts in December and January, you need a system that captures transactions as they happen. For a black cab driver, that might mean recording fares, card income, fuel, repairs and vehicle-related costs each week. For a subcontractor, it means matching CIS deductions, invoices and materials costs as jobs progress. For a landlord, it means keeping rent, agent fees, repairs and finance-related records in order throughout the year.

Quarterly reporting should not mean doing accounts from scratch every three months. If the records are maintained properly, the quarter-end task is mainly reviewing the figures, correcting obvious errors and submitting the update on time.

Software is useful, but it is not the whole answer

Compatible MTD software is required for those within the rules. The right choice depends on how you work. A sole trader with a straightforward bank account and limited expenses may want a simple app that creates invoices, photographs receipts and connects to the bank. A business with employees, VAT, subcontractors or more complex bookkeeping may need a fuller package.

A spreadsheet can still have a place in some cases, provided it meets the digital record-keeping requirements and is linked correctly to compatible filing software. What does not work is typing totals manually from one system into another. MTD is designed to reduce that sort of rekeying, because it creates avoidable errors.

Do not choose software just because it is cheap or because a friend uses it. Ask whether it handles your bank feeds, invoices, VAT scheme, CIS position and property income properly. Also consider who will maintain it. Some clients want to keep records themselves and have their accountant check the figures before submission. Others prefer to send over their paperwork regularly and leave the bookkeeping to us. Both approaches can work, as long as responsibilities are clear.

The biggest risk is poor information, not the deadline

More frequent reporting makes gaps in records show up sooner. Missing receipts can mean missed allowable expenses. Payments into a personal account can be overlooked. Cash income, refunds and card-processing fees can be recorded incorrectly. For CIS workers, failing to retain deduction statements can make it harder to claim credit for tax already deducted.

There is also a trade-off to understand. Quarterly updates may give a better sense of profit, but they are not necessarily the final tax calculation. Seasonal businesses can look very different from one quarter to the next. A construction worker may have a strong period followed by quieter weeks. A landlord may face a large repair bill after several months of steady rent. Good records provide useful information, but tax planning still needs the full context.

That is why it helps to review the numbers rather than simply press submit. A regular check can identify whether you are putting enough aside for tax, whether expenses are being categorised sensibly and whether a change in profits calls for a conversation before the year end.

What to do now if MTD may affect you

The best preparation is unglamorous but effective: get your records into a weekly or monthly routine. Start by separating business and personal spending wherever possible. A dedicated account does not remove the need for bookkeeping, but it makes the trail much easier to follow.

Next, make sure every income source is accounted for. This matters particularly where work is paid through different platforms, cash, bank transfer and card payment. Landlords should keep each property’s records clear. Subcontractors should reconcile invoices and CIS statements instead of waiting until the return is due.

Then test the process before it becomes compulsory. Using accounting software for a few months reveals where the real friction sits. It might be a bank feed that needs checking, a receipt process that nobody follows, or expense categories that are too vague to be useful. Sorting these issues out early is far less stressful than tackling them in the final days before a filing deadline.

Finally, do not confuse digital reporting with tax planning. MTD will not decide whether an expense is allowable, calculate the best way to extract income from a limited company or automatically spot every relief available to you. Those remain decisions that depend on the facts. The records are the foundation, not the advice.

A better way to look at the change

For many working people, tax admin has traditionally been something dealt with after the work is done: at year end, in the quiet period, or when HMRC sends a reminder. The future of Making Tax Digital rewards a different approach. A small amount of attention during the year can replace the pressure of trying to reconstruct twelve months of trading from memory.

Short And Sons Accountants works with clients whose days are already full - on the road, on site, managing tenants or running a growing company. The aim is not to make you spend more time looking at figures. It is to put a practical system around them, so you know what needs doing and when.

Start with the records you have this week. Once they are accurate and up to date, Making Tax Digital becomes less of an HMRC headache and more of a routine part of running your business.