Making Tax Digital for Income Tax: What SME Owners Need to Do Before 2026

The UK government’s Making Tax Digital (MTD) for Income Tax initiative is a significant change to the way small business owners and self-employed individuals report their income tax. Set to start in April 2026, this new system will require eligible taxpayers to maintain digital records and submit quarterly updates instead of just relying on a single annual self-assessment tax return. Understanding what you need to do now is crucial to staying compliant and avoiding penalties.

Ysobelle Edwards supports SME owners in preparing for this change, offering practical guidance, HR and business advisory services, and the expertise to help you implement digital record-keeping and effective tax reporting practices.

What Is Making Tax Digital for Income Tax?

Making tax digital is a government initiative designed to modernise the UK’s tax system by improving tax reporting, reducing errors, and supporting economic growth. Under the MTD for income tax rules, qualifying taxpayers will need to keep digital records of their business income, property income, and other relevant income sources.

This affects sole traders, self-employed individuals, and certain property businesses with income above the income threshold set by HMRC. Qualifying income includes gross business receipts, rental income, and other taxable earnings. Ysobelle Edwards can help you determine what counts as qualifying income and guide you through integrating it into MTD-compatible software for accurate reporting.

Who Must Comply?

The MTD for Income Tax pilot programme has helped HMRC test the digital system with volunteers, and from April 2026, MTD will become mandatory in phases. SME owners with qualifying income over £50,000 (from April 2026), £30,000 (from April 2027), or £20,000 (from April 2028) will need to comply.

VAT-registered businesses are already familiar with digital reporting under MTD for VAT, and many of the same principles apply. Qualifying income includes your combined gross income from self-employment and property rental before expenses. Even if you aren't VAT registered, if your qualifying income exceeds these thresholds, you will need to adopt MTD-compatible software. Ysobelle Edwards' business advisory services can help ensure that your business is fully prepared and that your tax records are ready for seamless submission.

What SME Owners Need to Do Now

1. Review and Digitise Your Record-Keeping

Start by transitioning from paper records to digital systems. Organise all your business records, including income, expenses, and property earnings, so they can be easily imported into MTD-compatible software. This foundation is crucial for smooth quarterly reporting.

2. Choose MTD-Approved Software

Select software that can connect to HMRC's systems, handle quarterly submissions, and integrate with your existing accounting processes. The right software will automatically calculate your tax liability and ensure accurate reporting throughout the year.

3. Determine Your Qualifying Income

Calculate your combined gross income from self-employment and property rental (before expenses) to see if you'll need to comply. This determines whether you fall under the £50,000 (2026), £30,000 (2027), or £20,000 (2028) thresholds and when you'll need to start using MTD.

4. Set Up Government Gateway Access

Create your Government Gateway account with a user ID and password. This online portal is where you'll submit your quarterly updates, make your final annual declaration, and manage all your MTD obligations.

5. Test Your New System 

Before the rules apply to you, practice using your chosen software to create sample quarterly reports and familiarise yourself with the submission process. This helps identify any issues early and ensures a smooth transition when MTD becomes mandatory for your business.

Benefits of Making Tax Digital

While moving to digital for income tax may feel like a burden, the system has long-term advantages. Digital record-keeping improves accuracy, simplifies tax admin, and ensures you always know your income tax position. For self-employed individuals and small business owners, this means fewer surprises at the end of the tax year, easier tax calculations, and better oversight of your business income.

The move to MTD also supports economic growth by reducing errors in self-assessment submissions, improving HMRC efficiency, and encouraging strategic thinking in business finances. With software compatible with MTD, you can quickly generate tax reports, submit quarterly updates, and maintain compliance with confidence. 

Ysobelle Edwards helps implement these practices so that small business owners can focus on growing their business rather than worrying about tax administration.

Final Steps for Compliance

In summary, small business owners and sole traders should start by transitioning from paper records to digital record keeping, ensuring that all business income and property income is accurately documented. Selecting MTD-compatible software that can submit self-assessment tax returns and quarterly updates is critical. Setting up a Government Gateway user account allows you to manage tax records, submit period statements, and complete your final declaration for each relevant tax year.

Familiarising yourself with accounting software that is MTD approved and testing your digital process in advance will make the switch smoother. Ysobelle Edwards’ advisory and HR services provide tailored support for SMEs, helping you navigate tax reporting, ensure compliance, and maintain accurate income tax positions with confidence.

To Conclude

Making tax digital for income tax represents a significant change for small business owners and self-employed individuals, but early preparation can turn it into an advantage. By adopting digital software, maintaining accurate tax records, and understanding qualifying income, you’ll be ready to meet MTD rules and manage your tax affairs efficiently.

With Ysobelle Edwards’ support, small business owners can simplify tax reporting, gain clarity on their self-assessment tax bill, and free up time to focus on business growth. The right digital record-keeping practices and MTD software ensure your tax calculations are accurate, supporting long-term compliance and helping your business thrive under the new UK tax system.

Disclaimer: This information is for general guidance only. Tax rules are complex and subject to change. Individual circumstances vary significantly. Always consult a qualified accountant or tax advisor before making MTD compliance decisions. We accept no responsibility for actions taken based on this content.