If you’re running a VAT-registered business, you’ll already be familiar with Making Tax Digital (MTD). Since April 2022, nearly all VAT-registered businesses have been required to keep digital records and submit VAT returns using compatible software.
Now, MTD for Income Tax is being introduced in stages, bringing new digital record-keeping and reporting requirements for sole traders and landlords.
Whether you’re preparing for the next deadline or looking to replace your existing accounting software, there are plenty of options to choose from. We also look at four providers – Sage, Xero, Tide and Countingup – and explain what they offer, how much they cost and which businesses they’re best suited to.
What is Making Tax Digital?
Making Tax Digital is an HMRC initiative designed to make tax reporting more accurate and efficient. Rather than relying on manual records and entering figures into HMRC’s online forms, businesses use compatible software to keep digital records and submit information directly to HMRC.
There are currently two main parts of MTD that businesses need to be aware of.
Making Tax Digital for VAT
All VAT-registered businesses must comply with MTD for VAT unless they’re exempt.
This means keeping VAT records digitally and using compatible accounting software to submit returns to HMRC. You can use a dedicated accounting platform, or bridging software that connects existing records, such as spreadsheets, to HMRC’s systems.
The good news is that most established cloud accounting providers already support MTD for VAT. If you’re using Sage, Xero or another recognised platform, you may not need to change anything.
Making Tax Digital for Income Tax
MTD for Income Tax began on 6 April 2026 and is being introduced according to your qualifying income.
| Qualifying income | MTD start date |
|---|---|
| Over £50,000 in 2024/25 | 6 April 2026 |
| Over £30,000 in 2025/26 | 6 April 2027 |
| Over £20,000 in 2026/27 | 6 April 2028 |
These thresholds apply to gross income from self-employment and property combined, before expenses and tax. They don’t apply to company turnover.
If you’re affected, you’ll need to keep digital records, submit quarterly updates of your income and expenses to HMRC, and complete your annual tax return using compatible software.
The quarterly updates don’t replace your annual Self Assessment tax return, and you won’t need to pay tax every quarter simply because you’ve submitted an update.
What about limited companies? MTD for Income Tax doesn’t apply to limited companies, and the government has confirmed it doesn’t intend to introduce MTD for Corporation Tax. However, limited companies registered for VAT must still comply with MTD for VAT.
Best accounting software for Making Tax Digital
There are two things to consider when choosing MTD software. First, does it support the specific tax obligations that apply to your business? Second, can it handle your wider accounting needs?
You might only need a basic package for keeping digital records and filing returns. But if you’re managing employees, stock, suppliers or international transactions, it’s worth looking at what else the software offers.
Sage
Sage offers several accounting products, covering everything from straightforward Self Assessment to VAT, payroll and more advanced financial management.
For VAT-registered businesses, Sage Accounting lets you calculate VAT, maintain digital records and submit returns directly to HMRC. It also takes care of everyday tasks such as invoicing, bank reconciliation and expense tracking.
There are three main Sage Accounting plans. Start covers the essentials, Standard adds features including cash flow forecasting and CIS management, while Plus offers inventory management, budgeting and multi-currency accounting.
You can also use Sage Copilot, its AI-powered assistant, to help with bookkeeping and other financial tasks.
Sole traders who need MTD for Income Tax can instead use Sage’s dedicated Sole Trader software, which includes a free plan for non-VAT-registered businesses. It supports digital record-keeping and MTD reporting, although the free version limits features such as invoicing and bank connections.
MTD compatibility: MTD for VAT through Sage Accounting. MTD for Income Tax through supported Sage products, including Sage Sole Trader.
Pricing (excluding VAT):
- Sage Sole Trader Free: £0 per month
- Sage Sole Trader: £7 per month
- Sage Accounting Start: £20 per month
- Sage Accounting Standard: £43 per month
- Sage Accounting Plus: £59 per month
Promotional discounts are available on selected paid plans.
Xero
Xero’s Making Tax Digital features allow you to maintain digital records and submit VAT returns directly to HMRC. Xero also supports MTD for Income Tax, including the new quarterly reporting requirements.
Beyond tax compliance, you can manage bills, send invoices, reconcile bank transactions and generate financial reports. Payroll is available too, with different allowances depending on your subscription.
Xero is also useful if several people need access to your accounts. There are no per-user licence fees for general accounting access, so you can give your accountant or finance team access without paying for additional licences.
Its Simple plan is designed for non-VAT-registered businesses, including sole traders who need MTD for Income Tax. Larger businesses will generally need Ignite or above, particularly if they issue more than 20 invoices a month or want more sophisticated reporting.
MTD compatibility: MTD for Income Tax across its UK accounting plans; MTD for VAT on VAT-enabled plans.
Pricing (excluding VAT):
- Simple: £7 per month
- Ignite: £18 per month
- Grow: £39 per month
- Comprehensive: £55 per month
- Ultimate: £70 per month
Xero currently offers 90% off for the first six months.
Tide
Rather than offering accounting software as a completely separate service, Tide’s bookkeeping and tax tools are built into its business banking platform.
If you’re a sole trader, you can access free MTD for Income Tax tools through your Tide account. You can categorise transactions, capture receipts, calculate tax estimates and submit quarterly updates to HMRC. Tide also offers the option to automate these quarterly submissions.
If you’re VAT registered, Tide’s paid Accounting service allows you to prepare and submit VAT returns. It adds financial reporting, profitability insights and cash flow forecasting, giving you a better picture of how your business is performing. You can also connect external bank accounts, although you’ll need a Tide account to use its accounting tools.
One limitation to be aware of is that Tide Accounting doesn’t support VAT filing under the Flat Rate Scheme. Its Self Assessment tools also have eligibility restrictions, including for sole traders using CIS.
MTD compatibility: Free MTD for Income Tax tools for eligible sole traders; MTD for VAT through paid Tide Accounting plans.
Pricing (excluding VAT where applicable):
- Free MTD tools: £0 for eligible sole traders
- Invoice Assistant: £5.99 per month
- Tide Accounting: £13.99 per month for sole traders or £19.99 for limited companies
- Admin Extra: £17.99 per month for sole traders or £24.99 for limited companies
Separate banking charges may apply.
Countingup
With Countingup, you can manage your business banking and accounting through a single app. It automatically categorises transactions, tracks income and expenses, and calculates how much tax you might owe.
You can also create invoices, capture receipts and share financial information with your accountant. Because transactions are recorded directly through your business account, there’s less need to transfer information between different systems.
Countingup supports Making Tax Digital for VAT, allowing you to prepare and submit VAT returns directly to HMRC from the app.
Its other tax features are useful for day-to-day financial planning. For example, you can automatically put money aside for future tax bills and earn 1.2% AER (variable) interest on your tax savings. The app also provides tax estimates and filing reminders.
Unlike Sage or Xero, Countingup doesn’t charge different amounts for different sets of accounting features. All subscriptions include its banking, bookkeeping and tax tools, with pricing determined by how much money is deposited into your account each month.
MTD compatibility: MTD for VAT. Countingup’s published product information does not currently confirm direct MTD for Income Tax quarterly and annual submissions, so check with the provider before choosing it for that purpose.
Pricing:
Countingup offers a three-month free trial, followed by:
- £5 per month: Monthly deposits up to £750
- £12 per month: Monthly deposits between £750.01 and £7,500
- £20 per month: Monthly deposits above £7,500
Additional transaction charges can apply.
How to choose Making Tax Digital software for your business
It’s worth looking beyond the basic ability to file a tax return. Most MTD-compatible accounting software can perform that function, but the additional features and costs vary considerably.
Check which taxes it supports. MTD for VAT and MTD for Income Tax have different requirements. If you’re a sole trader who needs both, check that your chosen software can handle both types of submission. You should also confirm it supports all the income sources you need to report.
Think about how you’ll use it as your business grows. Basic bookkeeping software may be sufficient today, but will you eventually need payroll, inventory management, multi-currency accounting or more detailed financial reports? Changing providers later could mean migrating years of accounting records.
Consider your existing systems. If you already use a CRM, ecommerce platform or payment provider, look for accounting software that integrates with it. This can reduce manual data entry and help you keep financial records accurate.
Check the full cost. Introductory discounts can make a package look considerably cheaper than it is. Compare the regular monthly subscription, additional user fees, transaction charges and any extras you’ll need.
Finally, speak to your accountant before making a decision. They may already use a particular platform and can advise on whether it will meet your reporting requirements.
HMRC also provides separate software finders for MTD for VAT and MTD for Income Tax, allowing you to check whether a product is recognised for the tax you need to report.
Can you get Making Tax Digital software for free?
Yes. You don’t necessarily have to pay a monthly subscription to comply with Making Tax Digital.
For example, Sage offers a free MTD for Income Tax plan for non-VAT-registered sole traders, while Tide provides free MTD tools to eligible sole traders with a Tide business account.
There are also free and low-cost alternatives from other providers, as well as bridging software if you want to continue using spreadsheets.
However, free plans often come with restrictions on invoicing, bank connections or other accounting features. Before signing up, check that the software covers all your tax obligations and allows you to complete the required submissions to HMRC.
For a growing business, paying for a more comprehensive package may be worthwhile if it saves time on bookkeeping, reduces errors or gives you better visibility over your finances.
