If you are a small business owner, you may have heard a lot of hullabaloo recently about MTD. Perhaps your accountant has started pulling their hair out in frustration over it? No?
You may have seen recently that the deadline for MTD for Income Tax Self Assessment (ITSA) has been pushed back to 2026. Whatever the case, you need to know about how it affects you and your small business!
First off, what is MTD?
MTD, or Making Tax Digital, is a UK government initiative that aims to digitise the tax system to make it more efficient and easier for taxpayers to comply with their tax obligations. Currently, under MTD, businesses with an annual taxable turnover above the VAT threshold (£85,000) are required to use digital tools to record and transmit their VAT information to HMRC.
MTD for ITSA will apply to individuals and small businesses from April 2026 if their total gross income from self-employment and property exceeds £10,000 in a tax year.
What could MTD mean for your small business?
- Little and often. Instead of a once-a-year headache-inducing self assessment tax return, small businesses will face four separate filing events during the tax year. This means if you’re scared of your accounting ledger and keeping your receipts in a shoebox, it may be time to change tact! Tax is going digital and you need to as well.
- Digital record keeping. For small businesses, the impact of MTD will depend on their current record-keeping practices and their familiarity with digital tools. You may already use digital tools to record and transmit tax information, in which case the transition to MTD may be easy. However, other small businesses may need to invest in new software or spend time learning how to use digital tools to comply with the requirements of MTD.
- Increased control over cash flow and tax payments. Four separate filing events in the calendar year ensure that nasty shocks are less likely to happen. You will have a better grasp of the tax you owe to HMRC, how to record your financial data and how to run your business digitally.
“Within about six months of opening my pub, a dreaded brown envelope from HMRC arrived with a £40,000 bill I didn’t expect. I didn’t expect it because I hadn’t factored it into my forecasts.”
Hannah Dawson, Founder and CEO of Futrli by Sage on why she decided to take the leap and develop tax forecasting software to protect and empower small businesses.
3 ways to MTD-proof your small business
As a small business owner, it's important to stay on top of your tax obligations to avoid penalties and ensure that you’re paying the correct amount of tax. Income tax self assessment can be a complex and time-consuming process, but there are steps you can take to make it easier in the future:
- Keep accurate and up-to-date records: Good record-keeping is key to making income tax self assessment easier. Ensure that you are updating your ledger often. (Daily if possible!) Having an up-to-date ledger unlocks the potential of what you can do with your financial information. Paying tax becomes easier, your records are digitised, and you can do forecasting and reporting straight out of your financial source data.
- Forecast: There are many digital tools available that can help you track your business finances and prepare your tax return more efficiently. You could forecast how much tax you are likely to pay through excel, or cut out the middleman and use forecasting technology to accurately predict your tax outgoings. Futrli connects directly to your Sage, QuickBooks Online or Xero account for data-driven real-time forecasts and tax predictions.
- Plan ahead: Don't leave everything until the last minute! Set aside time throughout the year to review your business finances and ensure that you're on track to meet your tax obligations. Through MTD, small businesses will have to prepare for four filing events per year. Get ahead of the curve now and develop some excellent bookkeeping habits.
By taking these steps, MTD, paying taxes, and staying compliant will feel easier for you and your small business in the future.