Many individuals and businesses are unsure about how Making Tax Digital (MTD) will impact them, leading to confusion and unnecessary stress. The truth is that MTD is designed to make tax reporting easier and more efficient through digital record-keeping.
Starting from April 2026, sole traders and landlords earning over £50,000 must move to digital record-keeping, with the threshold lowered to £30,000 a year later. While MTD offers benefits like better financial clarity, improved tax accuracy, and smoother compliance, myths surrounding it continue to cause concern.
In this blog, we’ll break down eight common misconceptions about MTD and show you how to stay ahead without the hassle.
Will I pay more tax with Making Tax Digital?
No, Making Tax Digital does not increase the amount of tax you owe. HMRC introduced MTD to reduce tax errors and fraud, which contribute to billions in unpaid taxes each year.
If you have always filed your tax returns accurately, MTD won’t change the amount you pay. It simply provides a more efficient and accurate way to record and report your taxes, ensuring you stay compliant without unnecessary mistakes.
Does hiring an accountant exempt me from MTD compliance?
No, hiring an accountant does not mean you can ignore Making Tax Digital requirements. Even if your accountant handles your bookkeeping and tax filings, you are still responsible for ensuring that your records comply with MTD rules.
Many people mistakenly believe that having an accountant means they don’t need to worry about MTD, but that’s not true. You must still maintain proper records and ensure they are accurate and up to date.
If you’re unsure about what MTD means for you, it’s best to discuss it with your accountant to ensure you remain compliant.
Does Making Tax Digital remove the need to file annual tax returns?
No, Making Tax Digital does not completely eliminate the need for an annual tax return.
For those following MTD for Income Tax, the traditional Self Assessment tax return (SA100) will no longer be required. However, this will be replaced by a final declaration each year, where you confirm your income and expenses to determine your tax and National Insurance contributions.
Will Making Tax Digital affect me if I'm not a business owner?
Yes, Making Tax Digital can still apply to you, even if you don’t consider yourself a business owner. For example, if you meet the threshold income from renting out a property, HMRC may see you as running a business, even if it requires little effort on your part.
Similarly, if you do freelance work alongside a full-time job, you might not think of yourself as self-employed, but HMRC does. From April 2026, landlords earning over £50,000 in rental income and freelancers making more than £50,000 outside of their main job will need to follow MTD rules for Income Tax.
If you are registered for VAT, you must also comply with MTD for VAT. Even if you sell products online as a hobby and have registered for VAT, HMRC considers this a business activity, meaning MTD rules will apply to you.
Are voluntarily VAT-registered businesses subject to MTD rules?
Yes, all VAT-registered businesses must follow Making Tax Digital, regardless of whether they registered voluntarily or because they met the VAT threshold. When MTD for VAT was first introduced in April 2019, it only applied to businesses above the threshold. However, the rules have since changed, and now, every VAT-registered business must comply.
Are small businesses exempt from Making Tax Digital compliance?
No, small businesses are not entirely exempt from Making Tax Digital. If a business is registered for VAT, it must comply with MTD rules, regardless of its size or turnover. However, when MTD for Income Tax begins in April 2026, sole traders and landlords earning over £50,000 will need to follow the rules.
In April 2027, the requirement will extend to those earning above £30,000. Businesses or individuals earning below these thresholds will continue with the existing Self Assessment system. The threshold drops again in April 2028 to £20,000.
Does MTD require full digital accounting records?
No, MTD does not require businesses to go completely digital with their accounting. While maintaining digital records is necessary, it doesn’t mean every single transaction must be processed electronically. Paper invoices and receipts can still be used, but the key requirement is that financial data is recorded digitally in a timely manner.
For transactions that begin on paper, businesses should ensure that important details are properly recorded. This helps maintain accurate records and keeps everything organised for tax reporting.
Will HMRC have complete access to all my financial records?
No, HMRC will not have unrestricted access to all your financial records. The information you submit under Making Tax Digital remains similar to what was previously required.
For example, VAT returns still include the same key details as before. The main change is that data must be recorded and reported more frequently. With MTD for Income Tax, instead of submitting one annual return, businesses and individuals must provide quarterly updates.
These updates don’t have to be perfectly accurate at the time of submission and you can update them in the End of Period Statement (EOPS), but they offer a clearer picture of your tax position throughout the year. This can help with financial planning and avoiding surprises when it’s time to pay taxes.
Common mistakes businesses should avoid
Many businesses mistakenly believe they can simply scan paper receipts without properly categorising them. This leads to inaccurate reporting and potential penalties. Avoid this by setting up clear categories in your accounting software and ensuring all transactions are correctly classified.
5 simple tips to stay ahead with Making Tax Digital
Switching to digital tax records? These simple tips will help you stay organised and compliant without the stress.
- Go digital step by step: If you have paper records, start digitising them bit by bit. Scan receipts and invoices regularly to stay on top of things and avoid last-minute stress.
- Check your accounts often: Reconcile your bank statements and financial records every month. This helps keep things accurate and makes tax submissions much easier.
- Learn and get support: Take advantage of online tutorials, software demos, and accountant consultations to familiarise yourself with MTD requirements
- Back up your records: Regularly save your digital financial records in the cloud or on an external drive to protect against data loss.
Write down your process: Keep a simple document on how you record and submit your data. This makes it easier for you—and anyone else who might need to do it later.
Do you still need an accountant with Making Tax Digital?
Yes! Even with Making Tax Digital simplifying tax reporting, having an accountant can still be invaluable. An accountant ensures your records are accurate, helps you understand tax rules, and keeps you compliant with HMRC. They can also provide financial advice, help you maximise deductions, and prevent costly errors.
Conclusion
Making Tax Digital is changing the way you handle taxes. It may seem confusing to you, but once you understand the rules, it gets easier. Going digital will save you time and reduce mistakes. You don’t have to figure it out alone; we’re here to help! Call us for a free consultation.
