Since April 2022, nearly all VAT-registered businesses in the UK have been required to maintain digital records and submit tax returns through the Making Tax Digital (MTD) initiative. The government is now expanding this system with MTD for Income Tax, which will require sole traders and landlords to adopt digital record-keeping and submit quarterly reports. The new rules begin with those earning over £50,000 in the 2024/25 tax year.
The transition from manual to digital record-keeping aims to cut down on errors and simplify tax reporting. However, as deadlines near, businesses must select software that meets both existing and upcoming requirements. The options available differ significantly in terms of cost, features, and compatibility with HMRC systems.
Understanding MTD for Income Tax
The rollout of MTD for Income Tax starts on 6 April 2026 for sole traders and landlords with annual earnings exceeding £50,000. The implementation will extend to lower income brackets in subsequent years:
- Those earning £50,000+ in 2024/25 must comply by 6 April 2026
- Those earning £30,000+ in 2025/26 face the deadline of 6 April 2027
- Those earning £20,000+ in 2026/27 must comply by 6 April 2028
Unlike MTD for VAT, which replaces annual returns entirely, MTD for Income Tax introduces quarterly updates on income and expenses while retaining the annual Self Assessment process. The main change involves using compatible software to maintain digital records and submit these updates directly to HMRC.
An important exception exists: limited companies remain exempt from MTD for Income Tax, though they still face MTD for VAT if registered. The government has made clear it has no plans to extend MTD requirements to Corporation Tax.
Comparing Four Software Options
Not every accounting tool supports MTD requirements equally. Some specialise in VAT compliance, while others focus on Income Tax, and a few handle both. The right choice depends on whether a business operates as a sole trader, is VAT-registered, or does both.
For VAT-registered businesses, established platforms like Sage and Xero already handle submissions without requiring adjustments. However, MTD for Income Tax imposes stricter requirements. Software must support quarterly updates, annual returns, and digital record-keeping for all income sources.
Here’s how four providers compare:
Sage: The Complete Solution
Sage Accounting handles VAT, payroll, and Income Tax submissions. Its Start plan, priced at £20/month, covers basic VAT compliance, while the Standard plan (£43/month) and Plus plan (£59/month) add features such as cash flow forecasting, inventory management, and multi-currency support.
For sole traders without VAT obligations, Sage Sole Trader offers a free plan, though it limits invoicing and bank connections. The software integrates seamlessly with HMRC’s systems for both VAT and Income Tax reporting.
Sage’s advantage lies in its scalability. Small businesses can begin with free or low-cost plans, while larger operations benefit from advanced tools like AI-assisted bookkeeping (Sage Copilot) and payroll services.
Xero: Flexible but Feature-Rich
Xero supports MTD for both VAT and Income Tax, including quarterly updates. Its Simple plan suits non-VAT sole traders, while the Ignite plan (£30/month) and higher tiers include payroll, multi-currency support, and advanced reporting.
Xero’s pricing structure is transparent, with no additional fees for accountant access—a useful feature for businesses working with external advisors. However, the Ignite plan is necessary for operations generating more than 20 invoices per month, making it less economical for high-volume businesses.
A notable limitation is that Xero’s MTD for Income Tax tools remain under development. While they currently meet requirements, businesses should verify compatibility with future HMRC updates.
Tide: Banking and Bookkeeping Combined
Tide’s free MTD for Income Tax tools are available for eligible sole traders, allowing them to categorise transactions, capture receipts, and submit quarterly updates to HMRC. For VAT-registered users, Tide’s Accounting service (£13.99–£19.99/month) adds VAT return filing, cash flow insights, and profitability tracking. However, Tide does not support the Flat Rate VAT Scheme and imposes restrictions on Self Assessment tools for certain sole traders.
Countingup: Simple but Limited
- £5/month for deposits up to £750
- £12/month for deposits between £750–£7,500
- £20/month for deposits exceeding £7,500
Alternative Solutions and Bridging Software
Not all businesses use dedicated accounting platforms. Some rely on spreadsheets or other tools to manage finances. For these users, bridging software connects existing records to HMRC’s systems, ensuring compliance without a full digital transition. Examples include FreeAgent and ClearBooks, which offer MTD for VAT and, in some cases, MTD for Income Tax support. These tools typically charge monthly fees starting at around £12, with additional costs for features like payroll or multi-user access.
Key Differences Between MTD for VAT and MTD for Income Tax
While both MTD schemes require digital records and software submissions, their structures differ significantly. MTD for VAT replaces annual returns entirely, meaning businesses submit nine or fewer returns per year, depending on their accounting period. In contrast, MTD for Income Tax introduces quarterly updates—four submissions annually—while still requiring the full Self Assessment process. These updates focus solely on income and expenses, with tax payments remaining annual.
Another distinction lies in exemptions. MTD for VAT applies to nearly all registered businesses, with only a few exceptions for religious or technical reasons. MTD for Income Tax, however, targets specific income thresholds, £50,000, £30,000, and £20,000, leaving lower-earning sole traders unaffected until later stages. Landlords with rental income below these limits are also exempt for now.
Leave a Reply