How do I prepare for Making Tax Digital?

Choose HMRC-recognised MTD software, connect your business bank account, set up expense categories, import historical data if needed, and practice the workflow before MTD becomes mandatory. Start 3-6 months early.

What do I need for MTD compliance?

You need HMRC-recognised software that stores digital records and submits quarterly updates via the MTD API. You also need to maintain digital records of all income and expenses with digital links (no manual re-keying).

When should I start preparing for MTD?

Start at least 6 months before your mandatory start date. If MTD applies from April 2026, begin preparation in October 2025. This gives time to choose software, learn the system, and resolve issues.

Can I test MTD before it's mandatory?

Yes. You can join MTD voluntarily before your mandatory date. This lets you practice quarterly submissions without penalty for errors. Many software providers also offer test/sandbox modes.

Preparing for MTD: 6-Month Countdown Checklist

Making Tax Digital requires digital record keeping and quarterly submissions using HMRC-recognised software. To be ready for April 2026 (income over £50,000) or April 2027 (income over £30,000), start preparing at least 6 months in advance. This checklist guides you through everything you need to do.

MTD Preparation Timeline

6 Months Before (e.g., October 2025 for April 2026)

| Task | Priority | |------|----------| | Check if MTD applies to you | Essential | | Research MTD software options | Essential | | Choose and sign up for software | Essential | | Connect your bank account | High |

4 Months Before (e.g., December 2025)

| Task | Priority | |------|----------| | Set up expense categories | High | | Import historical transactions | Medium | | Learn the software interface | High | | Categorise existing transactions | High |

2 Months Before (e.g., February 2026)

| Task | Priority | |------|----------| | Review and clean up records | High | | Practice running quarterly summary | High | | Resolve any data issues | High | | Consider voluntary early submission | Optional |

Go Live (April 2026 or 2027)

| Task | Priority | |------|----------| | Begin official MTD record keeping | Essential | | Submit first quarterly update (by August) | Essential | | Establish ongoing routine | Essential |

Step 1: Check If MTD Applies to You

Income Thresholds

| Your Gross Income | MTD Start Date | |-------------------|----------------| | Over £50,000 | 6 April 2026 | | Over £30,000 | 6 April 2027 | | Under £30,000 | Not yet required |

What Counts as Gross Income?

| Income Type | Counts? | |-------------|---------| | Self-employment turnover | Yes | | Rental income | Yes | | Employment income (PAYE) | No | | Dividends | No | | Pension income | No |

Combined: If you have both self-employment and rental income, add them together.

Example:

Self-employment: £35,000
Rental: £20,000
Combined: £55,000 → MTD from April 2026

Learn more: MTD Income Thresholds Explained

Step 2: Choose MTD Software

Requirements

Your software must:

| Requirement | Why | |-------------|-----| | Be on HMRC's recognised list | Mandatory for compliance | | Store digital records | Core MTD requirement | | Submit via MTD API | How data reaches HMRC | | Maintain digital links | No manual re-keying |

Options to Consider

| Software | Starting Price | Best For | |----------|----------------|----------| | TaxFolio | £69.99/year | Tax-focused simplicity | | FreeAgent | £14.50/month | Full accounting needs | | QuickBooks | £12/month | Established brand | | Xero | £14/month | Accountant collaboration |

Selection Checklist

[ ] On HMRC's recognised software list
[ ] Connects to my bank(s)
[ ] Handles my income types (self-employment, property, or both)
[ ] Within my budget
[ ] Appropriate complexity for my needs
[ ] Good reviews/reputation

HMRC's recognised software list

Step 3: Connect Your Bank

Why Bank Connection Matters

| Benefit | Impact | |---------|--------| | Automatic transaction import | No manual entry | | Digital links compliance | Meets HMRC requirements | | Accuracy | Reduces errors | | Time saving | Categorise, don't type |

How to Connect

Most MTD software uses Open Banking:

Select your bank from the list
Log in to your bank's secure site
Authorise the connection
Transactions import (usually within 24 hours)

Multiple Accounts

If you have separate accounts for different purposes:

| Account | Action | |---------|--------| | Business current account | Connect (essential) | | Business savings | Connect (if used for business) | | Rental income account | Connect (if separate) | | Personal account | Don't connect (unless mixed use) |

Recommendation: Use a dedicated business account. It simplifies everything.

Step 4: Set Up Categories

Standard HMRC Categories

MTD submissions use standard expense categories:

| Category | Examples | |----------|----------| | Cost of goods sold | Materials, stock, subcontractors | | Car, van, travel | Mileage, fuel, public transport | | Wages and salaries | Staff costs | | Rent, rates, power | Business premises | | Repairs | Equipment and property maintenance | | Phone | Telecommunications | | Accountancy | Professional fees | | Interest | Business loan interest | | Other expenses | Everything else allowable |

Category Setup Checklist

[ ] Review default categories in your software
[ ] Add any custom categories needed
[ ] Set up rules for recurring transactions (e.g., always categorise direct debits to X)
[ ] Create categories for both income and expenses

Step 5: Import Historical Data

Why Import History?

| Reason | Benefit | |--------|---------| | Continuity | See full picture, not just from MTD start | | Comparisons | Compare quarters year-on-year | | Catch-up | Categorise past transactions to learn the system |

How Much to Import

| Option | When Useful | |--------|-------------| | Current tax year | Minimum recommended | | Previous full tax year | Better for comparison | | 2+ years | If switching from another system |

Import Methods

| Method | How | |--------|-----| | Bank feed (automatic) | May import up to 2 years of history | | CSV import | Export from old system, import to new | | Manual entry | Last resort for missing data |

Step 6: Categorise Transactions

Initial Categorisation

Once transactions are imported:

Review uncategorised transactions
Assign correct category to each
Split transactions if needed (e.g., mixed personal/business)
Mark personal transactions as such (exclude from business)

Build Categorisation Rules

Most software learns from your choices:

| Transaction | Rule Created | |-------------|--------------| | "ADOBE SYSTEMS" → Software | Auto-categorise future Adobe charges | | "SCREWFIX" → Materials | Auto-categorise future Screwfix purchases | | "SHELL" → Travel | Auto-categorise fuel purchases |

Review AI Suggestions

If using software with AI categorisation (like TaxFolio):

Review suggested categories
Accept correct suggestions
Correct wrong suggestions (improves future accuracy)
Train the system with your patterns

Step 7: Learn the Quarterly Workflow

What a Quarterly Submission Includes

| Data | Source | |------|--------| | Total income for quarter | Categorised income transactions | | Total expenses by category | Categorised expense transactions | | Running year-to-date totals | Accumulated from previous quarters |

Practice Run

Before MTD is mandatory:

Run a quarterly summary report
Review the figures
Check they match your expectations
Identify any missing or miscategorised items
Understand what HMRC will see

Quarterly Deadlines

| Quarter | Period | Deadline | |---------|--------|----------| | Q1 | 6 Apr – 5 Jul | 7 August | | Q2 | 6 Jul – 5 Oct | 7 November | | Q3 | 6 Oct – 5 Jan | 7 February | | Q4 | 6 Jan – 5 Apr | 7 May |

Learn more: MTD Quarterly Submissions

Step 8: Clean Up Records

Before MTD Starts

[ ] All transactions categorised
[ ] Personal transactions excluded
[ ] Duplicates removed
[ ] Missing income added
[ ] Receipts attached to expenses (recommended)

Data Quality Check

| Check | Action | |-------|--------| | Income matches bank deposits | Reconcile any differences | | Expenses have receipts | Attach digital copies | | Categories are consistent | Review and standardise | | No gaps in transaction history | Import missing data |

Step 9: Consider Voluntary MTD

Benefits of Early Adoption

| Benefit | Impact | |---------|--------| | Learn without pressure | Mistakes aren't penalised | | Build good habits | Routine established before mandatory | | Identify issues early | Time to resolve problems | | Confidence | Know the system works |