Making Tax Digital 2025: What UK Businesses Must Do Now

Making Tax Digital (MTD) 2025 is a UK government initiative aimed at modernising the tax system. It requires businesses and self-employed individuals to keep digital records and submit tax returns using MTD-compatible software. While MTD for VAT is already in effect, MTD for Income Tax Self Assessment (ITSA) is coming soon. UK businesses need to prepare now to avoid disruptions or penalties.

Who Must Comply with MTD for ITSA?

MTD for ITSA affects:

• Self-employed individuals
• Landlords

Key thresholds:

Year	Income Threshold	Who Must Comply
April 2026	£50,000+	Self-employed & landlords
April 2027	£30,000+	Self-employed & landlords
TBD	£20,000+	Potential future threshold (not yet confirmed)

Some individuals may be exempt if they are:

• Digitally excluded due to age, disability, or location
• Members of a religious society with restrictions on electronic communications

Key Requirements for MTD 2025

To comply, UK businesses must:

1. Keep Digital Records
   • Maintain income, expenses, and all relevant data digitally.
2. Use MTD-Compatible Software
   • Software must be recognised by HMRC for direct submissions.
3. Submit Quarterly Updates
   • Report income and expenses every three months.
4. End-of-Year Declaration
   • Confirm accuracy and finalise tax obligations annually.

MTD 2025: Preparatory Year and Key Tax Changes

2025 is a preparatory year for the full rollout of Making Tax Digital for Income Tax Self Assessment (MTD for ITSA), which officially begins on 6 April 2026.

Eligible taxpayers are encouraged to start preparing now and can voluntarily sign up to test the service during 2025.

Who Is Affected (from April 2026)

From 6 April 2026, self-employed individuals and landlords with a total annual income from self-employment and/or property exceeding £50,000 must comply with MTD for ITSA requirements.

Key Requirements

• Use MTD-compatible software to record income and expenses digitally.
• Submit quarterly updates to HMRC using that software.
• Finalise your tax position and send a final declaration (which replaces the traditional Self Assessment tax return) by 31 January following the end of the tax year.

Other Notable Tax Changes in 2025

The 2025–2026 tax year introduced several additional updates alongside MTD preparations:

• High Income Child Benefit Charge (HICBC): From summer 2025, employees can report Child Benefit payments and pay HICBC directly through their PAYE tax code using a new digital service.
• P11D and P11D(b) Forms: For the 2024 – 2025 tax year, all P11D submissions must be filed online by 6 July 2025.
• PAYE for Globally Mobile Employees: From 6 April 2025, employers must notify HMRC digitally about any proportion of income treated as non-PAYE for globally mobile employees.

For official details, refer to HMRC’s latest MTD for Income Tax guidance on GOV.UK:
https://www.gov.uk/guidance/using-making-tax-digital-for-income-tax

Steps for UK Businesses to Prepare

1. Understand the Requirements
   Review HMRC guidance on MTD for ITSA.
2. Assess Your Business Turnover
   Determine gross income for 2024 – 2025 to know when you must comply.
3. Choose the Right Software
   Evaluate software for:

Consideration	Details
Compatibility	Must be HMRC-approved MTD software
Ease of Use	User-friendly and intuitive
Features	Bank reconciliation, invoicing, expense tracking, reporting
Cost	Compare plans, including add-ons
Customer Support	Responsive and helpful support
Integration	Works with bank accounts, payment processors, CRM systems
Security	Data encryption, multi-factor authentication
Scalability	Supports business growth

Popular options: Xero, QuickBooks Online, FreeAgent

4. Digitise Your Records
   • Scan paper documents, convert spreadsheets, or fully adopt accounting software.
5. Seek Training and Support
   • Use provider resources and consult accountants for guidance.
6. Monitor HMRC Updates
   • Subscribe to HMRC alerts and industry news.

Challenges and How to Overcome Them

Challenge	Solution
Digital skills gap	Train staff or hire bookkeepers/accountants
Software and training costs	Explore free/low-cost software, check HMRC support options
Time investment	Automate bank feeds, invoices, and reports
Data security concerns	Use secure software, strong passwords, regular backups

Practical Tips for UK Businesses

• Start Early: Begin preparation before thresholds are reached.
• Use Automation: Bank feeds, templates, and integrations save time.
• Keep Records Accurate: Avoid penalties from incorrect submissions.
• Regular Review: Conduct quarterly checks before updates.

Example:
A self-employed plumber earning £52,000 in 2025 should start quarterly submissions from April 2026 using Xero to track income and expenses and prepare for end-of-year declaration.

Conclusion

Making Tax Digital 2025 is a significant shift for UK businesses. Preparation involves:

1. Understanding MTD requirements
2. Choosing MTD-compatible software
3. Digitising financial records

Early preparation ensures compliance, avoids penalties, and makes digital tax submissions smoother.

Need help with MTD 2025? Our UK accounting experts can guide you through software setup, record management, and quarterly submissions. Contact us today.

FAQs About MTD 2025

Q1. What are HMRC digital tax requirements for 2025?

A: Keep digital records and submit quarterly updates via MTD-compatible software for VAT and ITSA.

Q2. What is MTD-compatible software?

A: Software recognised by HMRC for submitting income, expenses, and tax reports directly.

Q3. What are the penalties for non-compliance?

A: Late or incorrect submissions may incur fines. Severity depends on frequency and type of errors.

Q4. How does MTD affect income tax and VAT?

A: Requires digital record-keeping and quarterly submissions using approved software.

Q5. How can UK companies prepare effectively?

A: Adopt MTD software early, train staff, digitise records, and monitor HMRC updates.