What Is Making Tax Digital?

Making Tax Digital (MTD) – see our cloud accounting glossary for related terms like quarterly updates, Final Declaration and bridging software is HMRC’s programme to move the UK tax system online. It requires businesses to keep their books digitally and submit tax returns using compliant software. If you use Xero, you already have everything you need to comply.

Making Tax Digital started with VAT in April 2019 and is now expanding to income tax. The next big step, Making Tax Digital for Income Tax (MTD for ITSA), turns the annual tax return into a quarterly process for sole traders and landlords. You record your income and expenses digitally through the year, then submit them in four quarterly submissions plus a final declaration. Here’s what UK businesses need to know in 2026, and how Xero handles it.

Making Tax Digital for VAT

Since April 2022, all VAT-registered businesses must use Making Tax Digital software to keep digital records and submit VAT returns. This applies regardless of turnover – if you’re VAT-registered, you’re in scope.

In practice, this means:

  • You must keep your VAT records digitally (not on paper or in spreadsheets without a digital link)
  • You must submit your VAT return through recognised software, not through the online portal
  • There must be digital links between your records and the submission – no manual retyping of figures

Xero has been recognised for VAT submissions since the programme launched. You can file your VAT return directly from Xero in a few clicks.

Making Tax Digital for Income Tax: the 2026 deadline

From 6 April 2026, Making Tax Digital extends to income tax self assessment (MTD for ITSA). This affects sole traders and landlords with qualifying income above £50,000. The rollout is phased:

  • April 2026: Sole traders and landlords with income over £50,000
  • April 2027: Income threshold drops to £30,000
  • April 2028 onwards: HMRC plans to extend the rollout further, potentially to all self-employed individuals

Under the new ITSA rules you will need to send quarterly figures to the tax authority (not just an annual tax return) and file a final declaration at the end of the tax year. Xero supports both quarterly submissions and the final declaration process.

The headline change with Making Tax Digital for Income Tax is record-keeping frequency, not the tax itself. You still pay income tax under the same rules; you just file four times a year instead of once. To meet the Making Tax Digital for Income rules you need to log every transaction in your books digitally and use compatible software to send them in. That means a recognised platform that holds your books and talks to the Government Gateway directly. Xero UK is on HMRC’s recognised list for MTD for ITSA, so the same Xero subscription you use for bookkeeping handles the quarterly submission of income and expenses too.

How Xero Handles Making Tax Digital

MTD for VAT in Xero

If you’re already using Xero for your bookkeeping, VAT compliance is built in. Xero connects directly to the gateway, so you can:

  1. Record your transactions in Xero as normal
  2. Go to Accounting > Reports > VAT Return
  3. Review the figures Xero has calculated from your records
  4. Click Submit to file your return

That’s it. No separate software, no bridging tools, no manual data entry. Your bank feeds, invoices, bills, and expense records all feed directly into the VAT return calculation. The digital links requirement is satisfied automatically because everything lives in one connected system.

MTD for Income Tax in Xero

Xero has been part of the ITSA pilot programme and is ready for the launch. If you’re a sole trader or landlord using Xero, the software handles:

  • Quarterly updates – send quarterly updates of income and expense summaries directly from Xero
  • Digital record keeping – your Xero records meet the digital record requirements
  • Final declaration – at the end of the tax year, submit your final figures through Xero (replacing the old annual tax return)
  • Multiple income sources – if you have both self-employment and property income, Xero handles separate submissions for each

Setting up Xero for MTD for ITSA is a short job if your books are already on Xero. In your Xero organisation, switch on the MTD for ITSA module under your subscription, link your Government Gateway login, and tag each business or rental property as a separate income source. Xero pulls quarterly totals for income and expenditure straight out of your transactions, so the four quarterly submissions take minutes once your bank feeds and bills are reconciled. Keeping digital records this way also means your final declaration is largely pre-filled from data you have already entered through the year.

Connecting Xero to the Government Gateway

To use Xero for MTD submissions, you connect your Xero account once. This is a one-time setup:

  1. In Xero, go to Accounting > Reports > VAT Return (for VAT) or the Income Tax section
  2. Click Connect
  3. You will be redirected to the Government Gateway login page
  4. Enter your Government Gateway credentials and grant Xero permission to submit on your behalf
  5. You’ll be redirected back to Xero, and the connection is live

The authorisation lasts 18 months before you need to reconnect. Xero prompts you when it’s due for renewal.

What about spreadsheets? Bridging software for Making Tax Digital

If you currently keep your records in Excel or Google Sheets and don’t want to switch to full accounting software, you have two options:

Option 1: Use bridging software – tools like VitalTax and 123 Sheets connect your spreadsheet to the gateway. You keep your records in the spreadsheet and the bridging tool submits the summary figures. This is the cheapest route to compliance (from around £30/year).

Option 2: Move to Xero – this gives you compliance plus proper cloud accounting: bank feeds, invoicing, expense tracking, and real-time financial reporting. If you’re going to invest time in compliance anyway, moving to Xero gives you far more value than a bridging tool alone.

We’ve written a detailed comparison of free and low-cost MTD software options on our sister site if you want to compare costs.

Penalties: what you need to comply with MTD rules

HMRC introduced a new penalty points system in January 2023. Here’s how it works:

  • You receive one penalty point for each late submission
  • Once you reach the threshold (4 points for quarterly submissions), you get a £200 penalty
  • Every subsequent late submission also triggers a £200 penalty
  • Points expire after 24 months of compliance (for quarterly filers)

There’s also a separate regime for late payment of tax owed. Interest accrues from the due date, and penalties kick in after 15 days (2% of tax owed), 30 days (another 2%), and ongoing (4% per annum).

The first ITSA quarterly update is due by 7 August 2026 for anyone starting in April 2026. Miss it and you start accumulating penalty points.

Do I need to sign up? Exemptions from Making Tax Digital

Not everyone will need to sign up for Making Tax Digital. There are exemptions for people who are digitally excluded, have religious objections to using computers, or live in areas with no internet access. If you qualify for an exemption, you can continue using the existing process.

How JacRox Helps with Using Making Tax Digital

As Xero Gold Partners, we help UK businesses get up to speed with using Making Tax Digital end to end:

  • Setup – we link your Xero account to HMRC, configure your VAT scheme, and make sure your records meet the requirements
  • Quarterly submissions – we can prepare and submit your quarterly returns on your behalf, so you don’t have to think about deadlines
  • Migration from spreadsheets – if you’re still using Excel, we handle the move from spreadsheets to Xero so you’re ready
  • Ongoing support – The rules change regularly. We keep you informed and make sure your software stays compliant

Not sure if Making Tax Digital applies to you? Get in touch and we’ll check your situation. There’s no charge for an initial conversation.

Related guides: How to file VAT returns in Xero | Setting up Xero for your business | Excel vs Xero comparison | Xero bookkeeping software guide | Xero vs QuickBooks

Looking for help? Our Xero accountants work with businesses like yours every day.

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