What is MTD compatible software for Income Tax?

Published by Farazia Gillani posted in Making Tax Digital on 10 April 2026

Britain’s drive to digitise tax reporting has finally reached income tax. From 6 April 2026, sole traders and landlords with qualifying income above £50,000 must use software that can record transactions digitally, send quarterly updates and file an annual return. Additional bands of taxpayers will enter the regime later. The result is a new market for MTD compatible software for Income Tax, designed to support the UK’s shift toward digital tax reporting. This article explains what those tools must do, the choices available and the practical implications for small businesses.

Why digital compliance matters

HMRC aims to reduce errors and close the tax gap by requiring businesses to keep digital records and submit updates every three months. This change affects anyone who files through self-assessment and earns qualifying income above the thresholds, including landlords with rental properties and self-employed individuals who will rely on MTD software for landlords and sole traders. Limited companies and most partnerships are excluded for now. To comply, businesses must choose MTD compatible software for Income Tax that meets HMRC’s technical specifications: it must create digital records, send quarterly updates to HMRC and submit the final tax return. If a business keeps separate records for property and self‑employment, it must send separate updates for each, though the data will be consolidated in one return.

What makes MTD compatible software for Income Tax?

HMRC recognises two broad categories of software: Complete accounting packages allow businesses to directly record income and expenses, connect to bank feeds, scan receipts, and issue invoices. These tools manage quarterly updates and annual submissions within one platform. Bridging software connects existing spreadsheets or legacy systems to HMRC, enabling businesses to continue using familiar tools while meeting digital linking requirements. Digital links are essential: data must flow automatically between records and the submission software without manual copying or pasting. Businesses can use more than one product, but they must ensure the tools work together so that each tax update is sent from a single product.

An MTD‑compatible solution must:

Create and store digital records of income and expenses across all relevant businesses.
Send quarterly updates directly to HMRC, summarising income and expenditure. HMRC will provide an estimated tax liability after each submission.
Submit the annual return by 31 January following the tax year.
Support digital links so that data flows automatically between systems without manual re‑keying.
Incorporate other income sources (pensions, dividends or partnership profits) in the final return.

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Complete accounting packages

For businesses looking to overhaul their systems, MTD software for landlords and sole traders and other full accounting platforms can offer a comprehensive solution. These products provide bank feeds, automated reconciliations, invoicing, and expense scanning. They are designed for users new to digital record keeping and often include tutorials and reminders. HMRC emphasises that there are both paid and free options, giving users flexibility. When assessing a complete package, consider:

Ease of use – the interface should be intuitive, particularly if staff will be entering transactions or scanning receipts.
Integration – the software should link with bank accounts, point‑of‑sale systems and any industry‑specific tools.
Support for multiple income sources – if you earn from both self‑employment and property, the package must handle separate records and produce separate quarterly updates.
Cost – providers offer different pricing models. Free software is expected to be available for basic functionality, but more advanced features may require a subscription.

Bridging solutions and spreadsheets

Not every business wants to replace its existing system. HMRC accepts spreadsheets, provided they are linked to bridging software that submits data digitally. Bridging tools act as a conduit between a spreadsheet and HMRC’s systems, generating quarterly updates and the final return. They are particularly useful for landlords with multiple properties or bespoke accounting set‑ups.

However, spreadsheets lack the time‑saving features of dedicated apps. They may also increase the risk of errors if formulas are incorrect or if manual entries break the digital link requirement. When using a bridging tool, ensure that:

The spreadsheet structure remains consistent across reporting periods.
Each cell containing figures is linked directly to the bridging software (no copying and pasting).
You update formulas and macros to accommodate any new income sources.

Using more than one product

It is possible to use a combination of software—for example, a specialist property management tool alongside a separate bookkeeping package. HMRC’s guidance allows multiple products, but each quarterly update must be sent from a single product and the tools must be connected via digital links. Businesses should map the flow of data between systems and test the integration well before quarterly reporting begins.

Selecting the right solution

Choosing Income Tax digital software for small businesses is not one-size-fits-all. HMRC provides an online tool that generates a customised list of options based on your circumstances. To use it, you need to know your qualifying income from self‑employment and property, any other income sources, whether you want to create new digital records or connect existing ones, and your preferred update period (standard tax year or calendar periods). An agent using the tool will see all compatible software and can filter results for clients.

Key considerations when selecting software include:

Scope – will the software handle all your income sources and support separate records for self-employment and property?
Compatibility with existing systems – can it import data from your current records, or will you need bridging software?
Update periods – if your accounting year does not align with the tax year, choose software that supports calendar update periods.
Agent access – ensure your accountant can access the system easily and that multiple agents can collaborate.
Future features – consider whether the software can accommodate changes to MTD, such as partnerships joining the regime later.

Once you have selected a product, you must connect it to HMRC by authorising access through a government gateway. HMRC does not recommend specific products but confirms that all listed software has been through its recognition process.

Risks and practical implications

Failing to adopt compatible software by the deadline could result in penalties. HMRC is introducing a points‑based penalty system: missing submission deadlines will accumulate points, and exceeding a threshold will trigger fines. Inaccurate or incomplete digital records could also lead to compliance issues. Businesses should therefore treat selecting Income Tax digital software for small businesses as a long-term investment. Transitioning early allows time to train staff, refine processes and identify any gaps in digital links.

Data security is another concern. Storing financial information digitally requires robust security measures and adherence to data‑protection laws. Businesses should review the provider’s security credentials and consider backup arrangements.

Choosing MTD-Compatible Software for Digital Tax Reporting

Making Tax Digital (MTD) requires businesses and individuals to maintain digital records and submit tax updates to HMRC using approved software. Choosing the right accounting platform can make the transition much smoother. MTD-compatible software helps automate record-keeping, reduce manual errors, and simplify quarterly reporting.

Several established accounting platforms already support MTD for VAT and are preparing or supporting MTD for Income Tax Self Assessment (ITSA). These tools connect directly with HMRC systems and help users manage finances more efficiently.

Popular MTD-Compatible Software Options

Xero

Xero is widely used by accountants, agents, and businesses across the UK. The platform offers cloud-based bookkeeping, bank feeds, automated invoicing, and strong reporting tools. It integrates with HMRC for MTD submissions and works well for growing businesses that want real-time financial data.

FreeAgent

FreeAgent is particularly popular among freelancers, sole traders, and landlords. It supports MTD for Income Tax and helps users track expenses, invoices, and tax estimates in one place. The software is designed to be simple and easy to use for individuals who do not have a full finance team.

Sage

Sage provides a range of cloud accounting products suitable for small and medium-sized businesses. Its MTD-ready software connects with HMRC and allows automated bank feeds, digital record-keeping, and financial reporting. Sage also offers tools for payroll, invoicing, and business management.

QuickBooks

QuickBooks Online is another widely used platform that supports full MTD compliance. It enables automated VAT submissions, expense tracking, invoice creation, and financial reporting. Many accountants recommend it because of its user-friendly interface and strong integration with banking systems.

Clear Books

Clear Books is HMRC-recognised software designed for accountants, sole traders, and landlords. It supports quarterly updates and end-of-year filings under MTD. The platform also includes tools for bookkeeping, invoicing, and financial reporting.

Landlord Vision

Landlord Vision is specialised property management and accounting software. It helps landlords manage rental income, expenses, property records, and tax reporting. The platform includes features designed to support landlords preparing for MTD for Income Tax.

Apex Accountants & Tax Advisors: your partner in digital compliance

Navigating MTD’s software requirements can be challenging. Apex Accountants & Tax Advisors offers tailored support to ensure clients select the right tools and remain compliant. Our services include:

Assessment of qualifying income – analysing your turnover across self‑employment and property to determine when you must adopt MTD.
Software selection – helping you choose HMRC‑compatible software, whether that is a complete package or bridging solution, and guiding you through the authorisation process.
Digitising existing records – converting spreadsheets into digital records and establishing digital links to maintain compliance.
Training and support – providing hands‑on training for staff and setting up processes for scanning receipts and linking bank feeds.
Quarterly monitoring and year‑end adjustments – reviewing your digital records before each update, checking accuracy and claiming available reliefs.
Handling exemptions and penalty disputes – assisting clients who may qualify for digital exclusion or need to appeal penalties.

Book a free consultation or contact us today to ensure your systems are ready for the digital era of income tax.

FAQs

What does MTD‑compatible software need to do?

It must create digital records, send quarterly updates summarising income and expenses, support digital links, and submit an annual return. Complete packages handle all of these tasks; bridging software connects existing records to HMRC.

Do I have to replace my existing bookkeeping system?

Not necessarily. If you prefer to keep spreadsheets, you can use bridging software to link them to HMRC. However, dedicated packages offer features such as receipt scanning and automated bank feeds.

How do I find software that meets my needs?

HMRC’s online tool asks about your income sources, update periods and whether you need to create new digital records or connect existing ones. It then provides a list of recognised software.

Can I use more than one product?

Yes. HMRC allows multiple products provided they are digitally linked and each submission is sent from a single product.

Are there free options available?

HMRC states there will be both free and paid software options. The availability of free software may be limited to basic functionality, so businesses should assess whether it meets their requirements.

What happens if I miss a quarterly update?

HMRC plans to introduce a points‑based penalty regime. Each missed submission will incur a penalty point, and accumulating too many points will result in a fine.