From April 2026, the way thousands of sole traders and landlords manage their tax affairs will change forever. In this article, Mark Kearsley, Tax Partner at DSG, explores how the government’s Making Tax Digital (MTD) initiative will mean that manual record keeping and once-a-year tax returns become things of the past.

Those with qualifying income above £50,000 will have to keep digital records and send quarterly updates through HMRC approved software. The threshold will fall to £30,000 in 2027 and £20,000 in 2028 which will bring many more small businesses and property owners into the new system.

It is the biggest change to the UK tax process in the past few decades. For many people it raises an important question: will MTD raise digital standards for small businesses or simply create another layer of compliance work?

Understanding the change

Under MTD, affected taxpayers will need to do a number of things to make sure they are compliant. Firstly, maintain digital records of income and expenses, as well as use compatible software (such as Xero for sole traders or Hammock for landlords), to send quarterly summaries to HMRC. They will also need to complete a Final Declaration at the end of each tax year, bringing together all income sources and adjustments.

Quarterly updates will follow a fixed schedule, with deadlines on 7^th August, 7^th November, 7^th February and 7^th May. Those who have both self-employment and property income will also have to complete eight submissions each year.

HMRC’s new points-based penalty system will apply to any missed updates. Each late submission earns one point. When four points are reached, a £200 fine is charged. Combined with a tougher late payment penalty system and higher interest rates, the cost of falling behind can build up quickly.

The challenges ahead

For many small businesses, the real challenge lies in the shift from annual to quarterly discipline. Bookkeeping can no longer be a once a year tidy up before the tax return is due. It must become a regular, accurate process.

Businesses that still rely on paper records or spreadsheets also face a steep learning curve when moving to digital tools. They will need to learn how to connect bank feeds, categorise expenses and keep a fully digital chain of data between systems.

There is also confusion around the new Basis Period Reform, which aligns all unincorporated businesses to the tax year. Those that do not already use an April year end may have to split profits between periods or adjust how they report. This adds more complexity – just as Making Tax Digital comes into effect.

Why digital doesn’t have to mean difficult

Despite the challenges, there are plenty of long-term benefits to MTD. Once a business keeps its books digitally, the financial data becomes live and useful instead of a backward-looking task.

Digital software designed for MTD makes the process easier and more accurate. Most recognised systems now include secure bank feeds and automatic tracking of income and expenses. They allow direct submission of returns to HMRC and provide clear audit trails that reduce errors. Because these systems are cloud based, they can be accessed anywhere – giving both business owners and accountants a real time view of cash flow and performance.

For landlords, the same approach means they can track property income and related costs in one place with visibility over rental yield and profitability. For small business owners, it allows invoices and expenses to be processed more quickly and improves collaboration with advisers. The result is a more organised way of working, which saves time and cuts down on paperwork.

At DSG, we are already seeing clients shift their mindset from compliance to productivity. Once the digital systems are set up, the admin burden drops, accuracy improves, and financial awareness grows. MTD can move from being a government rule, to real business advantage.

A practical roadmap

With less than 6 months until the first group joins MTD, preparation is key. Here is what we advise SMEs that will be affected to do now:

1. Check your income thresholds now: If your gross income from self-employment and property was more than £50,000 in 2024-25, you will be included from April 2026.
2. Choose your software early: Set up Xero, Hammock or another HMRC recognised system and start using it before the deadline.
3. Move to monthly bookkeeping: If your records are tidy every month, each quarterly submission becomes immediately more straightforward.
4. Test your digital links: Do not copy and paste between systems – every step from bank feed, to submission, must stay digital.
5. Understand the penalties: Even a short delay can trigger fines once points begin to build up.
6. Ask for support: An accountant can help you design a digital process or manage submissions on your behalf.

Beyond compliance

The chance to modernise how small businesses operate with MTD clearly outweighs some of the negatives. Whether through our full end to end service or quarterly support, we help clients stay compliant and use digital bookkeeping as a tool for insight.

The Great Digital Shift in Tax is not just about meeting HMRC requirements. It is about building stronger, more efficient and more financially aware businesses. Those who start early will be ready to thrive in a digital economy