MTD Software Guide: Your Complete HMRC Income Tax Solution

For years, Self-Assessment has been simple: gather receipts, add up income and expenses, and file one tax return by 31 January. That familiar routine is ending. If you’re within the scope, MTD replaces the single annual return with at least five submissions a year, all through HMRC-recognised MTD software. Yet confusion is rife. Some are paying for expensive systems they don’t actually need, while others who clearly fall within MTD’s scope remain completely unprepared.

This guide cuts through the noise. You’ll learn what MTD really requires, how to choose the right MTD software without overspending, how different income types and ownership structures affect your obligations, and what day-to-day digital reporting will look like in practice.

MTD Timeline & Mandatory Requirements

Who Needs to Comply with MTD & from When?

MTD applies to landlords and self-employed individuals with a combined qualifying income exceeding:

• £50,000 annually from April 2026

• £30,000 annually from April 2027

• £20,000 annually from April 2028

Exemptions may be available for individuals who are unable to use digital services due to age, disability, remote location, or religious beliefs. These exemptions are limited and require a formal application to HMRC with supporting evidence.

This transformation will ultimately affect millions of UK taxpayers, requiring the adoption of new technologies and processes to maintain compliance. However, the phased implementation and software marketplace development aim to provide both compliance solutions and potential benefits through improved financial management and reduced administrative burdens compared to traditional annual reporting methods.

Self-Assessment Integration

This final declaration combines quarterly update data with additional personal income sources, reliefs, and adjustments not covered in quarterly submissions. The process maintains comprehensive tax reporting while distributing the administrative burden throughout the year rather than concentrating it annually.

The government plans to introduce legislation requiring tax returns to be submitted through MTD software, completing the digital transformation of income tax compliance. This integration ensures consistency between quarterly reporting and final tax calculations while providing taxpayers with year-round visibility into their tax position.

MTD Compliant vs HMRC Approved Software

The distinction between MTD compliant and HMRC-approved software causes confusion among taxpayers and advisers alike. All software listed on HMRC's official directories has completed the recognition process, meeting the minimum functionality standards required for MTD compliance.

The key requirement for any MTD software is functional compatibility, the ability to maintain digital records, prepare quarterly updates, and submit information directly to HMRC via their API platform. Software must also support digital links when multiple products are used together, ensuring data integrity throughout the compliance process.

HMRC Recognition & Certification Process

Software developers must complete HMRC's recognition process before their products can be used for MTD compliance. This process involves technical testing, security verification, and functionality validation to ensure products meet minimum standards for business use.

The recognition process evaluates software capabilities across multiple areas: digital record creation and storage, calculation accuracy, API connectivity, user authentication, and data security. Products must demonstrate reliable performance under various business scenarios and user configurations.

HMRC maintains separate recognition processes for different MTD obligations (VAT, Income Tax) and software types (record-keeping, bridging, full-service). This granular approach ensures products meet specific requirements for their intended use while providing flexibility for diverse business needs.

Why Approval Matters for Users

Using HMRC-recognised software provides essential legal protection and compliance assurance. Only recognised products can submit valid MTD returns, making software choice a critical compliance decision rather than a simple preference.

Recognition ensures software meets security standards, protecting sensitive financial data during transmission and storage. This protection becomes increasingly important as businesses store more financial information digitally and submit data directly to government systems.

Additionally, recognised software receives ongoing updates, ensuring continued compatibility with HMRC systems and regulatory changes. This maintenance prevents compliance disruptions and ensures businesses can meet evolving MTD requirements without system changes or data migration.

HMRC Compliance Requirements for MTD

Keeping up with HMRC requirements requires disciplined record-keeping, regular updates, and adherence to deadlines.

Mandatory Digital Record Keeping

Quarterly Update Submissions

Quarterly updates are due on the 7th of the following month of the end of the quarter. Updates report cumulative year-to-date income and expenses, allowing corrections in future quarters. These submissions do not include tax calculations or declarations; final tax liabilities are confirmed during the year-end declaration.

Annual Self-Assessment Obligations

Taxpayers under the scope submit a final declaration by 31 January following the tax year, replacing the traditional Self-Assessment return. This combines quarterly update data with additional income, reliefs, or adjustments outside MTD scope. Digital submission through MTD software completes the full digital tax process while retaining familiar year-end calculations and payment procedures.

Penalties for Non-Compliance

MTD uses a points-based system for late submissions. Penalty points accumulate before financial penalties apply. Quarterly filers face penalties after accumulating four points, while annual filers face penalties after accumulating two. Late payment penalties are separate, tiered by delay duration, with interest accruing from the original due date.

Record Retention & Supporting Documentation

Digital records must remain accessible for six years in MTD-compatible format, even if the software changes. Adequate backups and data security are essential. Supporting documents such as contracts, invoices, and receipts should be available to substantiate digital records during HMRC reviews, though full scanning of every document is not required.

Key Features & Benefits of Making Tax Digital Software

Real-Time Record Keeping

MTD software captures transactions as they happen, giving immediate insight into cash flow and business performance. Automated bank feeds reduce manual entry and errors, while mobile access allows recording and monitoring from anywhere.

Automated Calculations & Submissions

Tax liabilities are calculated automatically, providing ongoing estimates for quarterly and annual obligations. The software generates MTD-compliant updates ready for review and submission, connecting directly to HMRC for seamless reporting.

Accuracy & Error Reduction

Digital record-keeping and automated transaction categorisation reduce mistakes. Built-in validation checks and bank reconciliation features catch errors early, ensuring accurate reporting and reliable tax calculations.

Time-Saving Automation

Recurring transactions, automated categorisation, and report generation cut down routine bookkeeping tasks. Machine learning improves accuracy over time, while automated reports support both compliance and business decisions.

HMRC Compliance Assurance

Using HMRC-recognised software provides confidence that submissions meet regulatory standards. Audit trails, pre-submission checks, and regular updates maintain compliance and simplify any enquiries.

Integration with Banks & Other Systems

Open banking feeds capture transactions in real time, while third-party integrations with POS, inventory, or CRM systems keep data consistent. Accountants can access client systems directly, supporting compliance and strategic planning without duplicating work.

MTD Software by Service Type

MTD software can be grouped into three categories: Bridging Software, API-Enabled Spreadsheets, and Full-Service software, based on the extent of automation they offer and the level of business management features they provide.

Bridging Software Solutions

How It Works

• Data Processing - Extracts information from spreadsheets, basic software, or manual records and categorises transactions according to HMRC MTD requirements.
• Compliance Management - Calculates quarterly figures, generates MTD-compliant submissions, handles secure HMRC API submissions, and maintains submission history
• Digital Audit Trails - Creates links ensuring integrity between source records and submissions

When to Choose Bridging Software

• Users with established spreadsheet systems and familiar workflows
• Businesses using industry-specific software lacking MTD functionality
• Sole traders with straightforward income and expense patterns
• Single-property landlords with minimal transaction complexity
• Seasonal businesses requiring cost-effective compliance

Limitations

• Limited business management features beyond compliance
• Restricted reporting capabilities
• Minimal automation requiring continued manual processes
• Limited integration with other business systems
• May become inadequate as business complexity increases

API-Enabled Spreadsheets

A hybrid approach providing familiar spreadsheet interfaces with built-in HMRC connectivity.

Features

• Standard spreadsheet functionality with MTD-specific templates
• Built-in validation rules ensuring HMRC compliance
• Direct API connectivity for submissions
• Automated calculation of tax-relevant figures

Advantages

• Familiar interface with minimal learning curve
• Cost-effective for basic compliance needs
• Combines spreadsheet flexibility with digital submission capabilities
• Suitable for seasonal or variable business activity

Considerations

• Limited compared to comprehensive platforms
• Requires disciplined record-keeping
• May lack advanced features for complex situations
• Potential scalability constraints

Full-Service MTD Software

Comprehensive platforms offering complete business management alongside tax compliance in a single integrated solution.

Core Capabilities

• Complete Record-Keeping - Automated bank feeds, transaction categorisation, digital audit trails and searchable transaction history.
• Compliance Management - Automatic quarterly calculations, MTD-compliant submissions, secure HMRC API handling, and final declaration preparation.
• Business Management - Invoicing, customer management, payment tracking, financial reporting, multi-user access and integration capabilities.

When to Choose Full-Service Software

• Multiple income sources requiring detailed tracking
• Increasing transaction volumes exceeding spreadsheet capabilities
• Need for comprehensive financial visibility and business insights
• Requirements for team collaboration and multi-user access
• Desire for automated processes and real-time financial information
• Integration with existing business systems or professional platforms

Limitations

• Higher subscription costs
• Learning curve for users comfortable with simpler systems
• May include unnecessary features for straightforward businesses
• Ongoing training requirements

Spectrum of MTD Software by Service Type

SIMPLE ←―――――――――――――――――――――――――――――――――→ COMPREHENSIVE

Spectrum Position Indicators

When to Consider Moving Right on the Spectrum

Most users move from left to right as their needs evolve:

From Bridging to API-Spreadsheets

• Manual processes become time-consuming
• Need better reporting than basic compliance
• Want automation while keeping spreadsheet familiarity

From API-Spreadsheets to Full-Service

• Spreadsheet maintenance becomes burdensome
• Need multi-user access or professional collaboration
• Require business insights beyond basic financial tracking
• Transaction volume exceeds comfortable spreadsheet management

When to Stay Put

• Current solution meets all your needs efficiently
• Cost of moving outweighs benefits
• Business requirements are stable and well-served by the current position

Key Insight

There's no universally "best" position on this spectrum. The right choice depends on where your specific needs, technical comfort, and budget requirements intersect.

MTD Software by User Type

Different taxpayers have varying requirements when it comes to MTD software. Choosing the right platform depends on the type of taxpayer, the complexity of income and expenses, and how they plan to manage compliance and reporting. This section outlines software considerations for landlords, sole traders, and growing property portfolios, helping readers make informed decisions.

MTD Software for Landlords

Property Income Reporting Requirements

Landlords must track UK and overseas property income and any additional self-employment activity separately. Software should categorise transactions correctly and maintain property-specific records for compliance and portfolio insight.

Expense Tracking

Multi-property management, variable rents, void periods, and tenant-specific arrangements must be supported. Expenses, including mortgage interest, repairs, insurance, and property management fees, should be captured accurately, with mobile access for real-time recording.

Key Features Landlords Need

Essential features include multi-property management, tenant tracking, lease and maintenance management, bank feed integration, and secure document storage. Software should also handle complex portfolios, holiday lets, commercial properties, and overseas rentals.

Compliance Considerations for Property Portfolios

Software must accurately allocate income and expenses for large portfolios or joint ownership arrangements while supporting specialised reporting for different property types. Integration with VAT systems ensures consistent compliance across multiple tax obligations.

MTD Software for Sole Traders

Sole traders require flexible software capable of managing diverse income streams, variable project work, and a clear separation between business and personal finances, while supporting tax planning and quarterly reporting.

Business Income & Expense Management

Software should capture all income and expenses, including travel, equipment, subcontractor costs, and professional development, with receipt digitisation and automatic bank transaction matching.

Self-Employment Tax Obligations

Clear separation between business and personal transactions is essential. Accurate profit calculations are essential for Class 4 National Insurance contributions, and mixed-income scenarios must be handled correctly for HMRC reporting purposes.

Integration with Personal Tax Affairs

Software should include other income sources for year-end declarations, support proportional expense allocation for home office or equipment uses and maintain proper documentation for HMRC enquiries.

Quarterly Submission Requirements

Automated preparation of cumulative income and expense updates ensures timely submission. Multiple business streams must be supported individually, with reminders and status monitoring for deadlines.

MTD Software by Cost

Making Tax Digital software comes in both free and paid versions, designed to suit different types of taxpayers. Understanding the differences helps landlords, sole traders, and small business owners select the right solution without overspending or compromising compliance.

Free MTD Software Solutions

Limitations of Free Software

Free software often has transaction limits, restricted support, and minimal advanced features. Integration with bank accounts, accountants, or third-party platforms is usually limited, and analytics or management tools are absent. Users with more complex income or multiple properties may quickly outgrow these limitations.

When Free Software is Sufficient

Free software works well for straightforward income structures, low transaction volumes, and minimal reporting needs. Users who are comfortable troubleshooting independently or managing basic workflows can rely on free solutions for MTD compliance. Seasonal or occasional landlords may also benefit from free software during active periods.

Transition to Paid Solutions

As income streams or property portfolios grow, migration to paid software may be necessary. Planning the transition carefully ensures historical data remains intact and compliance continues without disruption. Paid options provide broader functionality, support, and integration for expanding operations.

Paid MTD Software Benefit

Advanced Features & Functionality

Paid MTD software offers advanced capabilities beyond compliance, including multi-property management, project tracking, reporting dashboards, and customer or tenant management tools. Multi-user access, role-based permissions, and collaboration features support team operations for growing landlords, sole traders, or small businesses.

Integration Possibilities

Paid platforms integrate with banks, accounting systems, payroll, CRM, and industry-specific tools. These connections reduce manual data entry, maintain data consistency, and streamline workflows across multiple income streams or properties.

Customer Support & Training

Professional support, including phone, chat, and email, helps with setup, troubleshooting, and complex transactions. Training resources such as guides, webinars, and tutorials enable users to leverage software capabilities while staying compliant with MTD obligations fully.

Regular Updates & Maintenance

Paid software receives continuous updates for regulatory changes, security improvements, and new features. Automatic updates ensure ongoing HMRC compatibility, reducing administrative burdens and maintaining system integrity.

Enhanced Security & Backup

Advanced security features protect sensitive financial and tenant data. Cloud-based backup ensures business continuity, while GDPR-compliant systems safeguard personal and financial information.

How to Choose the Right MTD Software

Selecting the right MTD software is a strategic choice, balancing compliance, usability, integration, and future growth. A clear evaluation ensures landlords, sole traders, and small business owners avoid costly mistakes and gain long-term value.

Assessing Your Needs

Consider your income complexity, transaction volumes, and potential growth over the next few years. Assess technical capability and preferences for software simplicity versus functionality. Evaluate integration requirements with banks, accounting systems, or professional advisers.

User Type Considerations

• Landlords - Multi-property management, tenant tracking, lease management, and property-specific reporting.
• Sole Traders - Flexible platforms accommodating varied income sources, project-based work, and business growth.
• Growing Portfolios or Small Businesses - Multi-user access, advanced reporting, and integration with other systems for efficient collaboration.

Budget & Cost Analysis

Compare initial implementation costs, subscription fees, training, and potential migration expenses. Consider cost scalability as income or property portfolios grow to avoid frequent software changes.

Feature Comparison Checklist

Evaluate core MTD compliance features—digital record-keeping, quarterly submissions, and reporting—alongside advanced functionality such as bank feeds, mobile access, multi-user capabilities, and analytics. Prioritise features based on current and projected requirements.

HMRC Approval Verification

Ensure the software is listed on HMRC’s recognised software directory and covers your obligations for VAT or Income Tax. Confirm provider status and update frequency for continued compliance.

Trial Periods & Demos

Use free trials to test usability, workflow compatibility, and critical functionality. Involve key users to confirm the software meets diverse needs and capability levels.

Customer Reviews & Recommendations

Research feedback from users with similar income types, property portfolios, or small businesses. Seek advice from advisers or industry networks. Verify that reviews are recent and reflect current software versions.

Implementation & Getting Started with MTD Software

Getting started with MTD software requires careful preparation to ensure smooth setup, accurate data, and ongoing compliance.

Setting Up Your MTD Software

Start by gathering financial data, business details, and HMRC registration information. Configure your chart of accounts, categories, and settings to match both business needs and compliance rules. Set up user accounts, permissions, and security controls from the outset to avoid later complications.

Data Migration

Decide which historical records need transferring and which can be archived. Test with sample data before migrating everything, then validate against source records to ensure accuracy.

Training & Onboarding

Invest in training on both system use and MTD requirements. Create simple internal guides for your specific processes and introduce features gradually so users build confidence before moving to advanced functions.

First Quarterly Submission

Record and reconcile all transactions before your first submission. Review for accuracy, submit to HMRC, and confirm receipt to ensure obligations are met and any issues are spotted early.

Ongoing Maintenance

Maintain regular transaction entry, reconciliations, and reviews to keep data accurate. Apply software updates promptly to stay HMRC-compliant and secure. Schedule periodic reviews to ensure the system continues to meet business needs as they evolve.

Common Challenges & Solutions of MTD Software

While Making Tax Digital software streamlines compliance, it also introduces new hurdles for businesses and landlords. Recognising these challenges and knowing how to respond makes the difference between smooth adoption and constant frustration.

Technical Difficulties & Troubleshooting

• Internet failures can cause real stress when a submission deadline is looming. The best safeguard is to keep a backup option ready, whether that’s a mobile hotspot or an alternative internet connection
• Compatibility can also be an obstacle, especially when older devices struggle with modern MTD platforms. Regularly reviewing and upgrading hardware avoids last-minute setbacks
• For many teams, the bigger issue lies in navigating unfamiliar software interfaces. Targeted training and ongoing user support can quickly build confidence and reduce mistakes

Data Accuracy & Reconciliation

• Discrepancies often appear in bank feeds, whether from timing differences, duplicate entries, or missing transactions. Routine reconciliations catch these problems before they snowball
• Misclassification of transactions is another common pitfall, as errors accumulate quietly over time. Setting clear categorisation rules and reviewing them regularly helps keep the data reliable
• Occasionally, errors are spotted only after a quarterly update has already been filed. Knowing the correct process for making adjustments and how these corrections affect future submissions is essential for staying compliant

Integration Issues

• When third-party systems don’t align properly with MTD software, data silos and duplicates can form. Careful integration planning and thorough testing minimise these risks
• Bank feed interruptions, often triggered by security updates or maintenance, are also disruptive. Monitoring feeds and having a manual entry fallback ensures business continuity
• At the same time, accountants and advisers sometimes struggle to gain access to client systems. Clear access procedures and reliable backup communication methods preserve collaboration and avoid delays

User Adoption & Training

• Resistance to new systems is natural, particularly for those comfortable with long-standing processes. A gradual rollout paired with clear change management can ease the transition
• Not every team member will need the same level of support, so training should be tailored to individual capabilities
• Even with good preparation, switching systems can disrupt workflows. Planning the timing carefully and providing extra support during the changeover helps to keep business operations steady

Future of MTD & Software Development

MTD is not standing still. The coming years will see new requirements and smarter tools that change how landlords and advisers manage compliance.

Upcoming MTD Expansions

• Partnerships will be brought into scope, meaning software must handle profit sharing and individual partner reporting. This will be especially important for landlords who own property jointly through partnership structures

• Corporation Tax is set to follow, affecting property companies and larger portfolios. This will require systems that can manage multiple tax types without losing clarity

• Overseas property income may also come into focus, so software that can deal with international reporting rules will be increasingly valuable

AI and Automation

• Automated receipt capture and expense categorisation will reduce manual bookkeeping and save time for landlords and accountants alike.

• Predictive analytics will support cash flow forecasting and tax planning, helping property owners anticipate their liabilities rather than just react to them

Enhanced Integration

• Open banking will expand, making it easier to link rental accounts, mortgages, and loans directly into MTD software

• Property-focused integrations, such as links with letting agent systems or portfolio management tools, will bring accounting and day-to-day management closer together

Conclusion

Different users have different needs. Landlords should look for property-focused platforms that simplify rental income tracking and tenant management. Owners with larger property portfolios will require multi-user platforms that offer advanced reporting and integration features. Sole traders should choose flexible software that can grow with their business. Ultimately, success with MTD lies in treating software adoption as a strategic choice. The right platform, combined with preparation and support, turns compliance into an opportunity to improve visibility, strengthen control, and create long-term value for both landlords and their advisers.

Glossary of Key MTD Terms

API (Application Programming Interface)

A way for different software systems to “talk” to each other. In MTD, it lets your accounting software connect securely to HMRC’s systems so you can send income and expense updates directly.

Bridging Software

A tool that links spreadsheets to HMRC’s MTD system. If you prefer using Excel or Google Sheets to track income and expenses, bridging software acts as the “bridge” that submits the data digitally to HMRC.

Digital Audit Trail

A clear record showing how each figure in your tax submission was calculated. HMRC requires “digital links”, meaning numbers can’t be retyped manually between systems but must flow electronically, so errors and tampering are less likely.

Digital Links

The direct electronic connections between records, spreadsheets, and software. For example, copying and pasting isn’t a digital link, but a spreadsheet formula or API connection is.

Final Declaration

The yearly “wrap-up” submission under MTD. It confirms all your income, reliefs, and allowances for the year after you’ve filed quarterly updates.

HMRC-Recognised Software

Only software that HMRC has approved can be used for MTD submissions. This includes full accounting packages, bridging software, and certain free options for simple cases.

Quarterly Updates

Reports you must send to HMRC every three months under MTD, showing income and expenses. They replace the single annual reporting cycle.

Self-Assessment

HMRC’s existing system, where individuals file an annual tax return (usually online) to declare income that isn’t taxed through PAYE, such as rental profits or business income.

Submission Deadline

The fixed date by which quarterly updates or the final declaration must be filed. Missing deadlines can lead to penalty points and eventually fines.