UK businesses face new tax software challenges as MTD expands
Since April 2022, nearly all VAT-registered UK businesses have been required to maintain digital records and file returns through Making Tax Digital (MTD). The initiative is now extending to Income Tax, introducing new quarterly reporting obligations for sole traders and landlords beginning in 2026. The implementation follows a tiered schedule based on income levels: entities earning over £50,000 in 2024/25 must comply by April 2026, while those with earnings between £30,000 and £20,000 have until 2027 or 2028 to adjust.
The transition from manual record-keeping to digital submissions seeks to minimize errors and simplify tax processes. However, not all accounting software currently accommodates both MTD for VAT and the forthcoming MTD for Income Tax requirements. Some systems demand bridging tools to interface with spreadsheets or legacy databases, while others integrate directly with HMRC’s infrastructure. For businesses operating under VAT alone, established providers such as Sage and Xero already satisfy existing obligations, but the addition of Income Tax compliance introduces new challenges.
Software Solutions for MTD for Income Tax
Sage provides specialized solutions for both VAT and Income Tax obligations. Its Sage Accounting platform handles digital VAT records and submissions, while Sage Sole Trader offers a free tier for non-VAT businesses requiring MTD for Income Tax. Paid subscriptions start at £20 per month for basic accounting functions, escalating to £59 for advanced capabilities such as inventory management and multi-currency transactions. The company also incorporates AI through Sage Copilot to assist with bookkeeping tasks, though this remains optional.
Xero adopts a streamlined approach by including MTD for Income Tax in its standard accounting packages. The Simple plan, priced at £15 per month, covers fundamental tax tools, while higher-tier subscriptions add payroll functionality, multi-user access, and enhanced reporting features. Currently, it provides a 90% discount for the first six months, though this promotion may not apply universally.
Banking-Integrated Accounting Tools
Tide merges banking and accounting services, offering free MTD for Income Tax tools to eligible sole traders. Its paid Accounting service (£13.99/month) extends coverage to VAT filings, though it excludes participation in the Flat Rate Scheme and imposes restrictions for Construction Industry Scheme (CIS) users. The platform automatically syncs with bank transactions, reducing manual data entry requirements. However, its limited functionality may prove insufficient for businesses with complex tax structures.
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Countingup combines banking and accounting, with pricing structured around monthly deposit volumes rather than fixed subscription tiers. Plans ranging from £5 to £20 per month include tax estimates, automated savings allocations for tax liabilities, and MTD for VAT support. The application also offers interest (1.2% AER) on tax savings balances, though its published materials do not confirm direct compatibility with MTD for Income Tax quarterly submissions. Prospective users should confirm software alignment before enrollment.
Key Requirements of MTD for Income Tax
Under the updated regulations, businesses must submit quarterly reports of income and expenses to HMRC, though these do not replace the annual Self Assessment tax return. Quarterly updates apply to sole traders and landlords whose earnings exceed the established thresholds. These thresholds are calculated from gross income derived from self-employment and property before deductions, and they do not apply to corporate turnover.
HMRC’s system will aggregate annual tax obligations based on these quarterly submissions, but no immediate tax payments are required at filing. Tax settlements remain annual through Self Assessment. The quarterly updates aim to enhance reporting accuracy by enabling direct data transmission from compatible software.
While Sage and Xero offer direct integration with HMRC for both tax types, other platforms may necessitate bridging solutions to connect legacy systems or spreadsheets. Tide, for example, provides free MTD for Income Tax tools for qualifying sole traders but does not support VAT filings under the Flat Rate Scheme. Countingup has not confirmed direct MTD for Income Tax quarterly submissions in its published documentation, necessitating user verification before adoption.
