Making Tax Digital 2025: What UK businesses must do now?

Making Tax Digital 2025 is a UK government initiative. Its goal is to modernise the tax system. MTD requires businesses to keep digital records. They also need to submit tax returns using compatible software.

While Making Tax Digital for VAT is already in effect, MTD for Income Tax Self Assessment (ITSA) is coming soon. UK businesses must prepare now to avoid potential disruptions and penalties.

MTD for ITSA: Key changes and dates

MTD for Income Tax Self Assessment (ITSA) will significantly impact self-employed individuals and landlords. These taxpayers will be required to submit quarterly updates of their income and expenses to HMRC.

They must use MTD-compatible software. A final declaration must also be submitted at the end of the year.

The MTD changes for UK businesses requirements for self-employed individuals and landlords use these key dates and thresholds

• Starting April 2026 self-employed individuals together with landlords having annual gross earnings exceeding £50,000 will need to follow MTD for ITSA requirements.
• As of April 2027 individuals earning above £30,000 per year will need to participate in MTD for ITSA.
• The government has planned to cut down the ITSA threshold level to £20,000 but did not specify a particular date. The authorities have not established any particular timeline.

Immediate steps for UK businesses

1. Understand the requirements

Familiarize yourself with the specifics of MTD for ITSA. HMRC Making Tax Digital 2025 provides guidance on its website. Key aspects include:

• Digital Record Keeping: Maintain all records digitally. This includes income, expenses and other relevant data.
• MTD-Compatible Software: Use software that can directly submit updates to HMRC.
• Quarterly Submissions: Submit income and expense summaries every three months.
• End-of-Year Declaration: Submit a final declaration to confirm accuracy and finalise tax obligations.

2. Assess your business turnover

Determine your gross income for the current tax year (2024-2025). This will determine when you need to comply with MTD for ITSA. If your income is near the £50,000 threshold, monitor it closely.

3. Choose MTD-compatible software

Choose software programs compatible with the requirements defined by HMRC. Visitors can find compatible software options through the website maintained by HMRC.

Users need to evaluate software based on three criteria and two subcriteria of ease of use and cost and features and customer support. Popular options include:

• Xero is a cloud-based accounting solution recognized for its simple navigation system.
• Users can access the complete invoicing and expenses and reporting capabilities through the insightful cloud-based application QuickBooks Online.
• The accounting solution FreeAgent provides its features to small businesses and independent contractors.

4. Digitise your records

If you’re not already keeping digital records, transition to a digital system. This may involve scanning paper documents, using spreadsheets, or adopting accounting software.

Ensure your records are accurate and complete. Inaccurate records can lead to penalties.

5. Seek training and support

Take advantage of training resources offered by software providers and accounting professionals. Understand how to use the software and comply with MTD requirements.

Consider consulting with an accountant or tax advisor. They can provide tailored advice and support.

6. Monitor HMRC updates

MTD regulations and guidance may change. Stay informed about the latest updates from HMRC.

Subscribe to HMRC’s email alerts or follow relevant industry news. This will ensure you remain compliant.

Choosing MTD-compatible software: Key considerations

Consideration	Description
Compatibility	Ensure the software is officially recognised by HMRC as MTD-compatible.
Ease of Use	Select software that is user-friendly and intuitive. This will minimise training time and reduce errors.
Features	Consider features such as bank reconciliation, invoicing, expense tracking, and reporting. Choose software that meets your specific business needs.
Cost	Compare pricing plans and consider the total cost of ownership. Some software may have additional fees for add-ons or support.
Customer Support	Evaluate the quality and availability of customer support. Prompt and helpful support can be invaluable during the transition to MTD.
Integration	Check if the software integrates with other tools you use. These tools might include bank accounts, payment processors and CRM systems. Seamless integration can streamline workflows.
Security	Ensure the software has robust security measures. These measures may include data encryption, multi-factor authentication and regular security audits.
Scalability	Choose software that can scale with your business. This will accommodate future growth and changing needs.

Potential challenges and How to overcome them?

1. Digital skills gap

Some businesses may lack the digital skills needed to prepare for MTD 2025. Provide training for your staff.

Consider hiring a bookkeeper or accountant. They can manage your digital records and submissions.

2. Cost of software and training

The cost of MTD-compatible software and training can be a burden. Explore free or low-cost software options.

HMRC may offer grants or tax relief to help businesses with MTD compliance 2025 costs.

3. Time investment

MTD requires a significant time investment. Streamline your processes. Automate tasks wherever possible.

Consider using features such as automatic bank feeds and invoice templates.

4. Data security concerns

Businesses may worry about the security of their financial data. Choose software with robust security features.

Implement strong passwords. Regularly back up your data.

Exemptions from MTD for ITSA

Certain individuals may be exempt from MTD for ITSA. Exemptions may apply to those who:

• Are digitally excluded due to age, disability, or location.
• Are practicing members of a religious society whose beliefs are incompatible with using electronic communications or keeping electronic records.

HMRC will assess eligibility for exemptions on a case-by-case basis.

FAQs

1. What are HMRC digital tax requirements for 2025?

HMRC requires businesses to keep digital tax records and submit quarterly updates using MTD-compatible software. These rules apply to VAT, income tax, and other taxes as part of the Making Tax Digital initiative.

2. What is MTD software for UK businesses?

MTD software is designed to help UK businesses comply with HMRC’s digital tax requirements. It allows users to maintain accurate digital tax records and submit reports directly to HMRC.

3. What are the MTD deadlines and penalties?

Key MTD deadlines include April 2026 for income tax for self-employed individuals earning over £50,000, and April 2027 for those earning between £30,000 and £50,000. Penalties apply for late submissions or non-compliance with MTD rules.

4. How does MTD affect income tax and VAT?

Making Tax Digital mandates digital record-keeping and quarterly submissions for VAT and income tax. Businesses must use approved software to ensure compliance with these requirements.

5. How can UK companies prepare for Making Tax Digital 2025?

Tax digitalisation for UK companies involves adopting MTD-compatible software, training staff, and maintaining accurate digital tax records. Early preparation helps avoid penalties and ensures smooth compliance with HMRC MTD rules.

Conclusion 

The introduction of Making Tax Digital 2025 for Income Tax Self Assessment marks a major shift in operations. Organizations operating in the UK need to initiate preparation strategies. The successful implementation of MTD involves three necessary steps: identifying requirements, selecting proper digital tools and processing record data into digital form.

Businesses which actively solve upcoming complications with necessary support will adapt easily to MTD. They can also avoid penalties. Your business success in dealing with digital tax submissions principles will become possible through current planning.