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If you have read our first piece on Making Tax Digital for Income Tax, you already know what it is, who it affects, and when the deadlines land. This piece covers what comes next: the practical questions that matter most once you know the change is coming. In short, transitioning to Making Tax Digital.
Which software should you use? What happens if you decide not to bother? Are there any exceptions? And what is the single most important thing you can do right now if you are approaching the income threshold?
Lucy Strange, Client Relationship Manager at Carthy Accountants, answers all four.
Still on paper records or Excel? Transitioning to Making Tax Digital for Income Tax requires digital bookkeeping and quarterly submissions to HMRC. In this video Lucy Strange at Carthy Accountants covers everything you need to know about making the transition.
The three packages Carthy Accountants work with most closely are Xero, QuickBooks, and FreeAgent. All three allow you to manage your bookkeeping directly within the software, produce reports on demand, and submit your returns directly to HMRC without needing to export data or use a separate filing tool.
Each has its own strengths and the right choice will depend on your business type, how you currently manage your records, and what level of functionality you need. HMRC will also make some free software available for MTD submissions, though the functionality of free options is likely to be more limited.
If you are currently using Excel or paper records, transitioning to one of these platforms before the deadline gives you time to learn the software at your own pace rather than under pressure. The transition is straightforward but it is always easier when it is not urgent.
You do your bookkeeping within the software directly. You can get more accurate and more regular reports, including profit and loss, throughout the year. And you can do the submissions directly to HMRC within the software.
Transitioning to Making Tax Digital for Income Tax is a compliance requirement. But the software that makes compliance possible also does something more useful: it gives you a live, accurate picture of your business finances throughout the year rather than a historical summary once it is all over.
Real-time profit and loss reports mean you can see how the business is performing at any point in the year, not just when the annual accounts are prepared. If your income is heading in an unexpected direction, you will see it in time to do something about it.
For anyone who sells goods or services and is monitoring their turnover against the VAT registration threshold, cloud software tracks that automatically. There is no need to maintain a separate calculation or worry about missing the point at which you need to register.
The business overview reports available in Xero, QuickBooks, and FreeAgent also give you a clearer picture of your financial position than a spreadsheet or paper records ever could. Many business owners who make the transition find they use their accounting software for far more than compliance once they are set up.
This is the question Lucy is asked most often about MTD, usually by people who are hoping the answer leaves some room for manoeuvre. It does not.
HMRC will use your previous tax return figures to identify who should be registered for MTD for Income Tax. If your income puts you above the relevant threshold, HMRC will know. They will enforce fines and penalties for people who fail to comply, and there is no realistic prospect of simply opting out without consequences.
The message is straightforward: MTD for Income Tax is mandatory for those who fall within the thresholds. Non-compliance is not a viable option.
HMRC will know if you should be within MTD because of your previous turnovers on previous tax returns. They will enforce fines and penalties for people who do not comply.
Yes. HMRC does recognise that certain circumstances make MTD compliance genuinely difficult or impossible, and exemptions are available. However, an exemption is not automatic. You must apply to HMRC and receive written confirmation that you are exempt from registering before you are entitled to treat yourself as outside the MTD regime.
If you believe you may have grounds for an exemption, speak to your accountant. They can advise whether your circumstances are likely to qualify and help you make the application correctly.
If there is a single action to take away from this conversation, it is this: do not wait until you are required to comply.
The businesses and landlords who will find transitioning to Making Tax Digital the smoothest are those who start the conversation early, get the right software in place, and build the habit of digital record keeping before the deadline arrives rather than scrambling to meet it at the last minute.
If your combined self-employment and rental income is approaching £50,000, April 2026 is closer than it might feel. If you are heading toward the £30,000 threshold, April 2027 will arrive quickly. In both cases the time to act is now, not when the relevant tax year begins.
Transitioning to Making Tax Digital for Income Tax is not something to fear. With the right software and the right support in place, the transition is manageable and the long-term benefits of having accurate, real-time financial data are genuinely valuable.
The worst outcome is finding yourself unprepared when a deadline arrives. The best outcome is having everything in place well in advance, with software that actively helps you understand and manage your finances throughout the year.
If you would like to understand what Transitioning to Making Tax Digital means for your specific situation, or if you are ready to start thinking about which software is right for you, get in touch. We would love to help you get ahead of this.
Get in touch: carthyaccountants.co.uk/contact
A short conversation now can save a significant amount of stress later.
