If you sell products through your own website, run a WordPress store, or use marketplace platforms like Etsy or eBay, there’s a good chance you’ll be affected by changes to how tax is reported in the UK.

Making Tax Digital (MTD) is a government initiative designed to modernise the tax system. That means keeping digital records and sending updates to HMRC using compatible software — replacing some of the old paperwork and helping reduce mistakes.

The idea is to make tax easier to manage, more accurate, and less time-consuming for people running their own businesses.

Whether you’re new to online selling or perhaps you just haven’t had time to look into MTD yet, this guide will hopefully give you a good overview of what to expect.

PLEASE NOTE: We are not a law or tax firm and do not therefore provide legal or tax advice. The information in this blog/article is not a substitute for advice from a qualified solicitor or tax professional. While we aim to provide accurate and helpful information, we do not guarantee that it is correct, complete, or up to date. If you require legal or tax advice—particularly for a specific issue, a complex matter, or one that requires personalised guidance— you should consult a qualified solicitor or regulated tax adviser.  

1. What is Making Tax Digital (MTD)?

Making Tax Digital (MTD) is the government’s way of bringing the UK’s tax system into the digital age. The main idea is to make tax simpler, quicker, and a lot less stressful — so no more digging through shoeboxes full of receipts or panicking at the last minute.

With MTD, you’ll be expected to keep your records digitally and send updates to HMRC more regularly, rather than just once a year. This is already a must for some businesses, and more people will be joining in soon.

So, what does this mean in practice?

✓  Digital Record-Keeping: Businesses and individuals must keep their tax records digitally (for example, using accounting software).

✓  Regular Updates: Tax data is submitted to HMRC more frequently, typically quarterly, rather than once a year.

✓  Use of Approved Software: Submissions must be made using HMRC-recognised software or bridging tools.

If you sell online and take care of your own taxes, MTD is definitely something to have on your radar. But don’t worry — it’s really not as scary as it sounds!

2. Why was Making Tax Digital introduced?

HMRC’s main goal is to cut down errors and make tax simpler for everyone. Many people either under-report or overpay because of missed paperwork, forgotten income, or last-minute guesses. MTD aims to reduce this by using digital tools to keep everything accurate.

Making Tax Digital isn’t new — it was first introduced back in 2015, with the government setting out their plans to get everyone keeping tax records online.  

Since then, it’s been rolled out in stages, and now more and more businesses and individuals need to get on board. If you’ve just started an online business or are new to managing your own taxes, it’s definitely something you’ll want to know about. 

For online sellers juggling orders, fees, and stock, this clearer picture of your finances throughout the year can be a real help. Moving everything online, HMRC hopes to save you time, stress, and paperwork. 

Here’s the catch — many sole traders aren’t prepared yet.

Research from IRIS Software found nearly half of UK sole traders aren’t ready for the changes, with 31% saying they’d never even heard of MTD. Around 45% risk failing to comply with the new rules, which could lead to penalties. 

There’s also a communication gap between sole traders and HMRC. Around 74% say they don’t get enough guidance, and many are waiting on official info before moving forward. Interestingly, younger sole traders tend to be more prepared — 37% of those aged 25-34 feel ready, compared to just 10% of those aged 45-54. 

3. Who needs to follow the rules?

MTD is becoming a must for more and more people. It’s already mandatory for all VAT-registered businesses, and from April 2026, it will be required for self-employed people (like website owners working as sole traders) earning over £50,000.

The threshold drops to £30,000 in April 2027, so even if you don’t have to follow the rules just yet, it’s worth preparing now—because chances are, you’ll need to use MTD sooner rather than later.

Right now, VAT-registered businesses with taxable turnover over £85,000 have had to follow MTD rules since April 2019, and smaller VAT-registered businesses joined in from April 2022.

MTD isn’t just for sole traders—it covers a range of business types depending on their tax affairs:

✓  Sole traders and self-employed people who earn over certain thresholds will need to comply with MTD for Income Tax (from April 2026 for most).

✓  VAT-registered businesses of any size, including companies, partnerships, and sole traders — they’re epected to use it for VAT.

✓  Landlords with rental income over certain levels also fall under MTD rules for Income Tax.

Limited companies and other incorporated businesses will face MTD requirements as it expands, especially for Corporation Tax in the future.

If you’re self-employed and earning over £50,000 from April 2026, you’ll need to use MTD for Income Tax. Those earning between £30,000 and £50,000 will be included from April 2027.

If you sell online and report your income through Self Assessment, it’s worth checking where you stand. You might not need to do anything yet, but it’s smart to be prepared!

See also: I’m a Solopreneur – What Products Do I Need to Get My Business Online?

4. When is it happening?

Making Tax Digital is being rolled out in stages, so it might already apply to you — or it could be coming soon. 

If you’re VAT-registered, you should already be following MTD rules — that started in 2019 for larger businesses, and 2022 for everyone else.

If you’re not VAT-registered, it depends on your income. 

From April 2026, if you’re self-employed or a landlord earning over £50,000, you’ll need to use MTD for Income Tax. That drops to £30,000 from April 2027.    

5. What tools or software do you need?

You’ll need to use MTD-compatible software to keep digital records and send updates to HMRC. That means no more paper books or Excel files on their own. Luckily, there are loads of user-friendly tools out there — even if you’re not great with numbers.

Xero is our favourite choice for online sellers. It’s simple to use, works with lots of ecommerce platforms, and handles VAT and MTD filing in the background. Other options include QuickBooks, FreeAgent, and Sage, which all have beginner-friendly versions and mobile apps to keep things easy on the go.

Many of these tools offer free trials or discounts, so it’s worth having a look before you commit.  

See also: 10 Ways AI Can Help Your Business Grow

FAQs

So… can I still use spreadsheets? 

Yes, you can — but only if you also use what’s called ‘bridging software’ to link your spreadsheet to HMRC. In practice, most people find it easier to move to proper MTD-compatible tools that do it all in one place.

Do I need to get an accountant? 

Not unless you want one. Plenty of online sellers and sole traders handle it themselves using software. But if you’d rather someone else deal with the tax side, an accountant can definitely help. 

Is this going to cost me loads? 

It depends what you go for, but many tools offer affordable plans for small businesses. Some even have free trials so you can see if it works for you before you commit.   

I’m not great with tech — will I cope? 

You should be fine. Most MTD software is made with beginners in mind, with clear menus, helpful tips and support if you need it. You don’t have to be a numbers person to get the hang of it.

Do I need to worry about this now? 

That depends on your income and whether you’re VAT-registered. You might already be included, or you might not need to do anything just yet — but it’s worth checking so you’re not caught off guard.   

What if I miss a deadline? 

HMRC is moving to a points-based system. If you miss a submission, you get a point. Collect enough, and you could face a penalty. Using MTD-ready software makes it easier to keep on top of your deadlines.

Want to learn more about Making Tax Digital? 

As ever, we’re not qualified legal or tax experts here at 123 Reg — just sharing the basics. For official guidance and the latest updates, head over to the gov.uk website.  Visit gov.uk to stay up to date on official details.