Business Taxes
Pay your taxes online using ‘Making Tax Digital’.
Introduction to 'Business Taxes'
The Government set up 'Making Tax Digital' (MTD) to make it easier for individuals and organisations to get their tax right and manage it more easily.
Put simply, it’s about using digital tools to:
- Keep your tax records up to date.
- Send VAT and Income Tax information to HMRC every quarter.
In this lesson, we’ll take you step by step through the process for the different parts of Making Tax Digital. You’ll find answers to some common questions and other sources of information here, too.
What you'll learn
- The different parts of Making Tax Digital.
- If and when you need to sign up for MTD.
- How to use it.
- Where to find more support.
How long it takes
9 minutes
About Making Tax Digital
Chapter 1
How long it takes
1 minute
What are the benefits?
'Making Tax Digital' aims to help you to manage your tax returns. It helps you save costs, time and space by getting rid of many existing paper-based processes. Plus, it can help simplify your financial planning, so you have more time to focus on other aspects of your business.
Who needs to follow the Making Tax Digital rules?
There are different Making Tax Digital rules, depending on your VAT status.
What's VAT?
If you sell goods or services, you’re likely to need to add VAT to the price you charge. There are different rates of VAT, and this page shows the current rates and where they each apply. It also shows how to work out prices with and without VAT.
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All VAT-registered organisations need to follow the Making Tax Digital for VAT rules, by keeping digital records and using software to send their VAT returns. You’ll need to register for VAT if your VAT taxable turnover is more than £90,000.
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Are you a sole trader or landlord? Then you may need to sign up to MTD for Income Tax. When you need to do this will depend on your qualifying income.
We’ll talk about these different MTD rules in the next two chapters.
Making Tax Digital for VAT
Chapter 2
How long it takes
2 minutes
Steps for Making Tax Digital for VAT
This next section will help you to work through the steps you need to take to set up for Making Tax Digital for VAT.
They are:
Step 1
Register for VAT.
Step 2
Pick your software.
Step 3
Store or transfer your details.
Let's look at each step in more detail.
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When you register for VAT, HMRC will automatically sign you up for Making Tax Digital. Wait for HMRC to confirm your registration before moving to Step 2.
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You’ll need to store your accounts online using Cloud software. This software lets you store, transfer and access files over the internet instead of keeping them stored in files on your computer. This makes transferring files safer and easier.
So the next step is to find a software system that works for your business. This software can be either compatible VAT record-keeping software, or ‘bridging’ software that can link non-compatible software (such as spreadsheets) to the HMRC systems. The government has a useful tool to help you find this software. Their list includes free options like QuickFile, MTDsorted and MyTaxDigital. .
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You’ll need to store the following information digitally:
- Any VAT accounting schemes you use.
- The VAT on goods and services you supply or receive.
- The 'time of supply' and 'value of supply' (value excluding VAT) for everything you buy and sell.
- Any adjustments you make to a return.
- Reverse charge transactions.
- Your total daily gross takings (if you use a retail scheme).
- Items you can reclaim VAT on (if you use the Flat Rate Scheme).
- Your total sales, and the VAT on those sales (if you trade in gold and use the Gold Accounting Scheme).
You’ll also need digital copies of documents covering multiple transactions made on behalf of your business by:
- Volunteers for charity fundraising.
- Third-party organisations.
- Employees’ expenses in petty cash.
Test your knowledge
That's not quite right!
Hint: Doing this will free up some space on your own computer.
That's right!
Storing your accounts online makes transfer to HMRC safer and easier and it frees up space on your own computer.
The Income Tax scheme
Chapter 3
How long it takes
3 minutes
Steps for MTD for Income Tax
Here are the steps to take:
Step 1
Work out your qualifying income.
Step 2
Find out if and when you need to use MTD.
Step 3
Pick your software.
Step 4
Sign up to MTD for Income Tax.
Step 1 – Work out your qualifying income
Your qualifying income can be from self-employment, rental or both. HMRC looks at your gross income (or ‘turnover’) from the year before. So, if you submitted a tax return for tax year 2025 to 2026, they’ll use this to work out your qualifying income for tax year 2027 to 2028.
If you part-own a property that you rent out, HMRC will work out your share.
What else counts towards your qualifying income?
- Disguised investment management fees or income based carried interest.
- Property or trading income that you get from a bare trust or interest in possession trust.
What doesn't count towards it?
- Qualifying care relief receipts if you’re a carer.
- Income from a partnership (unless you receive disguised investment management fees or income based carried interest).
Be aware
Do you live outside the UK? Check the residence and domicile rules rules to check what counts towards qualifying income.
Step 2 - Find out if and when you need to use MTD
With some exceptions, you’ll need to use Making Tax digital if:
- You’re registered for Self Assessment.
- You have income from self-employment and / or property.
- Your qualifying income is more than £20,000.
MTD for Income Tax is in phases. This means the date you’ll need to start using it depends on your qualifying income for the previous year.
Start from 6th April 2026
If your qualifying income for the 2024/2025 tax year is over £50,000.
Start from 6th April 2027
If your qualifying income for the 2025/2026 tax year is over £30,000.
Start from 6th April 2028
If your qualifying income for the 2026/2027 tax year is over £20,000.
Be aware
You’ll need to submit a Self Assessment tax return for the tax year before you start using MTD for Income Tax.
Step 3 – Pick your software
Just like the VAT scheme, you’ll need to pick software that works with this part of Making Tax Digital. This HMRC page has a list of free and paid software that is available now or soon. The list is likely to grow over time.
Step 4 – Sign up to MTD for Income Tax
Once you have software that works with the Income Tax part of MTD, you’ll be ready to sign up.
You'll need your:
Self Assessment user ID and password.
Business name, address and type of business.
Business start date (or the date you started to receive property income) if this is within the last 2 years.
Be aware
At busy times, MTD for Income Tax may be slow. There will also be times when system updates mean you won’t be able to use it.
This page shows service availability and issues.
Common questions
Chapter 4
How long it takes
2 minutes
Answering common questions
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Some people and businesses will be exempt from one or more parts of Making Tax Digital.
You may be exempt for MTD for VAT if:
- You or your business are subject to an insolvency procedure.
- You’ve cancelled your VAT registration but still need to send your final return.
You may be exempt for MTD for Income Tax if:
- You’re a trustee.
- You don’t have a National Insurance (NI) number on 31 January before the start of that tax year.
- You’re a personal representative of someone who’s died.
- You’re a Lloyds underwriter.
- You have a non-resident company.
You may also be able to apply for exemption from both parts, if it’s not reasonable or practical for you to use computers, software or the internet.
This may be due to:
Your age, health condition, disability or where you live.
Your religious objections to using computers.
You don’t have access to the internet.
HMRC has pages to help you find out if you’re exempt and guidance on how to apply for exemption from the VAT and Income Tax parts of MTD.
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You won’t need to start using MTD for Income Tax straight away – not until after you’ve sent your first Self Assessment tax return. If you meet the qualifying income amount, you’ll need to start using it the following tax year.
For example, if you start as a sole trader in November 2026, you’ll report this for the first time in the return for the 2026/2027 tax year. The deadline for this is 31st January 2028. So you’d start using MTD for that source of income in April 2028.
Remember
Until you earn above the income threshold, you don’t need to use MTD. Just complete your self-assessment in the usual way.
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If you have spreadsheets, you may be able to use these together with MTD-compatible bridging software. You’ll need that extra software to securely share your records with HMRC.
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Although HMRC doesn’t provide software, it does have a tool to help you find something to meet your needs.
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Unless you’re exempt or don’t meet the income thresholds, you do need to sign up for Making Tax Digital. If you don’t, or if you’re late submitting your quarterly updates, there may be penalties.
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MTD does not apply to Corporation Tax. But if you do pay this tax, you should file your accounts and Company Tax Return using HMRC-approved software. Unable to file your return online? You may be able to file a paper return.
Further support
Chapter 5
How long it takes
1 minute
Is it normal to need support?
Of course, everyone wants to get their tax right first time. That's why Making Tax Digital is trying to help support businesses by making the process simpler from record keeping to data transfer.
HMRC asked business owners who use MTD for VAT about their experience so far.
Their research (PDF, 2.2Mb) found that:
More than half
Feel more confident about getting their tax right.
61%
Feel MTD reduced the potential for making mistakes when submitting their tax return.
Twice as many
Spend less time on record keeping and tax returns since using MTD, compared to those who spend more time.
Where to go for support
Need further help with the Making Tax Digital service? The Government gives some helpful guidance on their website. You can also contact HMRC for specific guidance.
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Bank of Scotland Academy is committed to providing information in a way that is accessible and useful for our users. This information, however, is not in any way intended to amount to authority or advice on which reliance should be placed. You should seek professional advice as appropriate and required. Any sites, products or services named in this module are just examples of what's available. Bank of Scotland does not endorse the services they provide. The information in this module was last updated on 13th April 2026.