Making Tax Digital – getting to grips with software

One of LITRG’s main concerns surrounding Making Tax Digital (MTD) is how unrepresented taxpayers – by this, we mean those individuals who do not have a tax agent or accountant – will navigate the move to a system of keeping digital records using third-party software, if they are not already doing so. We recognise the challenges this might bring for those who may still be keeping paper-based business records or using spreadsheets.

Choosing the right software and learning how to use it may feel quite daunting, especially for those who are not already confident users of digital tools. LITRG has already raised concerns about HMRC’s choice to not offer free software of their own for MTD.

In this blog, we explore some of the issues in more detail.

  This blog does not delve into the MTD regime in detail, but you can find out more detailed information on our MTD information hub.

Software requirements of Making Tax Digital

There are three essential tasks that software must be able to do so that individuals using it can meet the requirements of Making Tax Digital for Income Tax. These are:

• Storing of digital records
• Sending quarterly updates to HMRC
• Preparing and submitting an end of year tax return using MTD compatible software.

The new regime will require affected individuals to file an end of year tax return under MTD using third party software, instead of a traditional self assessment tax return. HMRC currently provide a free online tax return filing system which can be used to complete and submit annual self assessment tax returns. But this will be unavailable for taxpayers who are in MTD. This service is popular, and we understand that the majority of unrepresented taxpayers choose to prepare and file their tax returns this way.

According to published figures by HMRC, there are also still over 300,000 individuals who file their tax return on paper (though not all of these individuals will be required to use MTD). Therefore, we believe that using third-party software will be new to many taxpayers who MTD will apply to from April 2026.

Exemptions

Individuals will be able to apply for an exemption from MTD if they believe they are digitally excluded. This means that it would not be reasonable for them to use compatible software to keep digital records. This may apply to you if you have a health condition or disability that would prevent you from using software. Some taxpayers are also automatically exempt, either permanently, or temporarily. Further details on exemptions can be found here.

Keeping digital records

Those who have income from self-employment or property have always been required to keep records of their income and expenses – that requirement has not changed. It is the way in which those records must be maintained which is changing, with taxpayers now being required to use compatible third-party software to keep records digitally. There are different types of software available for keeping digital records in line with the MTD requirements. We consider the various options available on the software page of our MTD information hub.

How to choose software

One of the main questions we are seeing crop up repeatedly from individuals is how to choose compatible software for MTD, especially since no MTD software is being provided by HMRC.

When choosing software, it may be a good idea for a taxpayer to start by looking at their current method of keeping records and then thinking about how this could be adapted to fit in with MTD. For example, if they are already using excel spreadsheets to track income and expenditure and that is working well, it may make sense to move to bridging software, rather than changing their whole record keeping system.

There are a variety of further factors that also need to be considered, and we explore some of these below.

Cost 

There are software packages at various price points. Some MTD software providers might offer basic packages of their product for free – but the features available might be limited. It may be that the free products do not offer the functionality that an individual needs for their particular circumstances. It is also worth considering whether any customer support will be included with a free product.

Although free software options may be attractive, it’s important to note that there may also be affordable paid options that could potentially suit a taxpayer’s needs better. Some products offer relatively small monthly or annual fees, which may be worth considering depending on an individual’s budget. Some providers may also offer different levels of packages at various price points, depending on the features required.

  Some MTD software providers might offer deals for new customers, such as your first three months heavily discounted or even free. It is important to read the small print before signing up to an offer such as this, so it is clear what the longer-term cost will be. This is discussed further in the software choices tool section of the blog, below. 

Cloud, desktop or app

Cloud software is online-only software, whereas desktop software is installed on a computer.

Cloud based software tends to be more regularly updated, but it requires internet access to be able to use it, so this might not be suitable without a strong internet connection. The main advantage to cloud-based software is that it is accessible from anywhere, so is likely to be a good option for someone who frequently travels or uses multiple devices (for example, a mobile phone when on the go, and a laptop when doing paperwork at home).

It also gives the security of knowing that if a laptop were to break, it should be quick and easy to log into the software on a new machine, (provided you know your log in details).

Desktop software can only be used on the device it is installed on. This tends to be more secure and doesn’t usually require an internet connection to use (although internet access will still be needed to submit quarterly updates and the end of year tax return to HMRC). This means that an individual shouldn’t have to worry about the service being down for maintenance. However, it tends to require manual updates and back-ups to be undertaken. From our research, it would appear that the desktop products available are more geared towards agents, with most providers moving towards a web-based service.

Note that some software may not be suitable for Mac users.  It is important for taxpayers to check that any software is compatible with their current computer set up. 

Income sources

If a taxpayer has certain income sources that are not covered by MTD, but need to be reported on the end of year tax return, such as investment income, pension income or the high income child benefit charge, they would need to make sure that the software they choose has the ability to capture this income – not all software will be able to do this.

It's also important for taxpayers to think about what their income sources may look like in the future, if there is the possibility of their circumstances changing. For example, a landlord thinking about starting a small business in the near future will need software which will be able to deal with both income from property and income from self-employment. Otherwise, taxpayers may risk having to change their software in the future to suit their requirements, which could be costly and time consuming.

Alternatively it may be the case that an individual needs more than one software product if they have both income from self-employment and from property and their chosen software cannot deal with both sources. This could be more expensive for taxpayers.

  It is worth noting that the cost of software will be a tax-deductible expense, as will the cost of any new hardware or computer equipment purchased. 

HMRC’s software choices tool

HMRC will not recommend a particular software product or software provider – it is down to the taxpayer to choose. However, HMRC have produced a software choices tool which is designed to help taxpayers find software that may be suitable for their circumstances.

The tool asks a series of basic questions such as whether the user is a sole trader (i.e. self-employed) or a landlord and what other sources of income they have. Once they have answered the questions, it will provide a list of potential software options.

You can then filter this list for various criteria, such as:

• the type of software,
• whether the software has a free version,
• whether it is compatible with MTD for VAT and
• whether it offers any accessibility features.

The results also show a list of features available for each software provider and whether the software can be used for both quarterly updates and the end of year tax return (though you are not able to filter for this specifically).

The tool gives no information about pricing, other than whether a free product is available. There are click through links to the software providers’ own websites, many of which do give a detailed breakdown of the different packages and pricing on offer.  The tool lists both software that is available now and software that is in development and is expected to be ready by April 2026.

Testing the tool

When we tested the tool (in late December 2025), we found that there were a variety of software options for individuals whose circumstances were straightforward.

However, the tool produced fewer options for someone whose circumstances were slightly more complicated. Disappointingly, there were significantly less results found for those who require accessible software due to blindness, impaired vision or deafness. However, we have been assured by HMRC that by April 2026, there will be software available to meet accessibility needs.

The software tool may not be particularly useful for those trying to plan ahead, as although it shows you which products are in development, it does not tell you when these are likely to be available. It could therefore be difficult for taxpayers to commit to software at the moment, as they may not have the full breadth of information required to make an informed choice.

The tool is regularly updated as new products become available and existing products are further developed, but taxpayers may find it frustrating having to check back at a later date.

Is ‘free’ really free?

Although the software tool can be filtered for free options, it’s important to check what ‘free’ actually means before committing to a product. For example:

• We noticed during testing of the tool that many of the software options that were listed when the ‘free’ filter was applied were either only free for a limited time, or included very basic features.
• One provider stated that it was ‘free to get started.’ It was not clear what this actually meant, and we found it difficult to find detailed information on their website about any future pricing model.
• A few products were only free if you banked with a certain bank.
• Some of the providers only offered telephone support when you upgraded to a paid package.

It is therefore possible that taxpayers could be misled into thinking that a product was free in all cases, when this isn’t actually true for all software providers.

Advantages and issues

How comfortable an individual is with using digital tools is likely to determine whether or not using software will be beneficial for them. Some taxpayers may find the features useful, however, others may see having to use software as an extra administrative burden.  We address some of the advantages below, as well as the potential pitfalls.

Potential benefits of using software

Using software can certainly offer advantages for the taxpayer (and HMRC alike) – HMRC’s hope is that it reduces the chance of errors being made. It’s easy to see how simple mistakes can be made when records are kept using pen and paper or a ledger. For example, by adding up a total incorrectly or transposing a figure (i.e. writing £123 instead of £132). As software carries out most of the calculations, there is less risk of error, especially if a taxpayer is using software which links directly to their bank account, as then very little manual data entry takes place. This may reduce the risks of mistakes creeping into the year-end tax return and so lessen the chance of being charged inaccuracy penalties by HMRC.

Another benefit is that by tracking income and expenses more regularly, there might be less chance of receipts and invoices being lost. The current annual tax return cycle means that if an individual prepares and submits their tax return near to the January deadline, they are having to gather information nine months after the end of the tax year and potentially up to 21 months after the particular transaction has taken place. The quarterly updates required under the MTD regime mean that income and expenditure data should usually only ever be 3 months old.

MTD also allows an individual to spread the bookkeeping and accounting workload over the year, rather than there being a larger job after the year end.

Possible disadvantages

Inaccurate tax estimates

HMRC’s view is that filing quarterly updates will allow taxpayers to have up to date, accurate information that can help them plan for their tax payments and avoid any nasty surprises. After each quarterly update is submitted, individuals will be able to see an estimate of their tax bill for the tax year that the update falls into, which HMRC say should assist with budgeting.

The estimated tax calculations that will be produced every quarter is an area that we think is likely to be problematic, but as this is a complex area, we have not covered this in detail within this blog. The main point for taxpayers to note is that these calculations are only estimates and may not accurately reflect the final tax bill. We believe the calculations could be confusing for taxpayers and may result in a misleading representation of their overall tax position. We plan to publish more guidance on this issue in due course. Watch this space!

Lack of support and assistance

One of the other areas we have concerns around is the lack of support available for unrepresented taxpayers from HMRC, particularly before they sign up for MTD.

Although there is a dedicated MTD customer service team for those who signed up early as part of the testing phase, individuals are only given the number to this line once they have signed up, so it is not currently publicly available.

If a person has a general question about their own MTD software, HMRC are unlikely to be able to help. This means taxpayers with an MTD problem might be unsure where to turn to – should they contact the software provider or should they speak to HMRC? It is likely to depend on the nature of the problem and for taxpayers this might not always be clear.

While HMRC are providing a huge amount of support for agents, including the agent outreach campaign and the recently published agent toolkit, there has been very little information published as to how they will support unrepresented taxpayers. 

Next steps and looking ahead

If you believe that MTD might apply to you from April 2026, the following steps might help you get ready:

• Look at your 2024/25 tax return as soon as possible and check the position – the self employment turnover / gross rental income figures included on this return will determine if you will be expected to join MTD in April 2026. This will be the case if the combined gross income was more than £50,000. You can read more here.
• Consider exemptions – if you were over the gross income threshold you still might be exempt automatically. You might also be able to contact HMRC to apply for an exemption from MTD if you believe you are digitally excluded. You can read more about exemptions here.
• If you do not qualify for an exemption, review how you currently keep your business records and consider whether this needs to change to comply with MTD.
• Start thinking about what type of MTD software might be appropriate for your needs and explore the options available.
• Consider whether you may need professional help – see our Getting help with Making Tax Digital page if you think you might.

MTD will affect many more taxpayers from April 2027, when the turnover threshold will be reduced to £30,000. It is believed that around one million more taxpayers will be required to use MTD for income tax from this date. The qualifying income threshold is then set to reduce further to £20,000 from April 2028.

As software developers receive more feedback, the expectation is that they will likely refine their products with simplicity and ease of use in mind. The second and third cohort of individuals who will be joining the regime in April 2027 and 2028 should hopefully benefit from any teething problems having already been addressed. There is lots of information available and it’s important to remember that mistakes can be corrected.

It is also worth mentioning that the new penalty regime developed for MTD is fairer than the penalty regime for self assessment, with no penalties being issued for a first offence.  We will continue to update our website with the latest guidance.