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Making Tax Digital (MTD) for Income Tax is here and it will, in time, fundamentally change how taxpayers manage their records and tax obligations. The introduction of MTD is phased so if you’re a sole trader or landlord earning over £50,000 in your last tax return, now is the time to make the switch from spreadsheets and paper-based record-keeping to digital accounting.
The income threshold will reduce over time, with sole traders and landlords earning over £30,000 under the scope of MTD for Income Tax from April 2027 and over £20,000 will likely be from April 2028.
MTD mandates the use of HMRC-compliant accounting software to store your records and the submission of quarterly updates to HMRC to summarise your tax position, with a final declaration to be filed at year-end. This means paper-based systems and spreadsheets will be phased out in time, as well as self-assessment tax returns.
Even if you don’t have to comply with MTD yet, making the transition to digital now means you start to benefit from using accounting software sooner as well as ensuring a seamless transition to MTD when it applies to you.
In this post we’ll explore the key features to look for when choosing accounting software for MTD and why selecting the right platform can make a significant difference to the management of your business finances and tax affairs as well as keeping you compliant.
The Importance of Choosing the Best MTD Software
Some small business owners might view the change to digital as an unnecessary inconvenience as it will mean changing long-standing accounting and record-keeping practices that have likely been working for many years.
The benefits of going digital, however, are significant and it’s important to maximise them by choosing good accounting software that fits your specific needs as well as being HMRC compatible. Choosing unsuitable or substandard accounting software can mean doing more admin than you have to, frustrating UX, limited functionality and potential non-compliance.
Making the choice right is crucial to maximise the benefits as good accounting software makes managing your finances and records easier, saving you a lot of time with manual data input significantly reduced, improved accuracy and much better visibility of your financial position and tax obligations.
What Features Should You Look for in MTD Software?
HMRC Compatibility
A key consideration that is a necessity when looking for MTD software is that it’s HMRC recognised. If it isn’t, you won’t be compliant with your MTD obligations. The software you choose must support MTD for VAT if you’re registered as well as MTD for income tax, enabling you to:
- Create Digital Records
- Submit Quarterly Updates with HMRC
- FIle your Final Declaration with HMRC
If you’re unsure, HMRC have created an online tool to help you assess the compatibility and suitability of software you’re considering.
Cloud-Based Access and Mobile Apps
Cloud accounting software brings a new level of flexibility in comparison with desktop systems as you can securely access your financial information from anywhere that you have an internet connection. This enables you to manage your finances on-the-go and keep your records up-to-date throughout the year, with all your data backed up and securely stored thanks to industry-standard encryption.
Whether you’re using a desktop machine, a tablet or an app on your mobile, you can upload receipts, send invoices, monitor cash flow and view your financial position whenever you need, ensuring you always have the tools and insight to manage your finances effectively at your fingertips.
Collaborative Access and Accountant Support
Cloud-based systems also enable you to benefit from collaborative access, in partnership with your accountant. You can grant access for your accountant so they can view and manage your accounts in the accounting software.
This facilitates seamless collaboration with your accountant able to review your records in and financial data without having to rely on you emailing spreadsheets or posting paperwork. They will be able to efficiently manage your finances, monitor your tax position, ensure compliance and develop and implement strategies that deliver real business value based on the data provided in the software.
Bank Feeds and Automation
It’s important to find accounting software that will integrate with your business bank account. This provides the foundation for the automation functionality of the software with automatic bank feeds allowing all your transactions to import automatically into the software.
They can then be automatically categorised and reconciled, taking a big bookkeeping task off your plate as well as improving accuracy, forming the basis for the reports and projections the software generates.
Invoice Management
Managing your invoicing is a key part of your business admin and accounting software makes the process easy. Everything can be managed digitally within the software, enabling you to quickly create and send professional, branded invoices as soon as work is completed, while maintaining a clear, real-time overview of your position.
Paid and unpaid invoices can be automatically tracked, and overdue invoices can be chased automatically, helping you maintain a more consistent cash flow while reducing the need for manual follow-up to save you time.
Real-Time Financial Reporting
A huge advantage of accounting software is the inbuilt financial reporting functionality that automatically generates a host of valuable reports and projections in real-time, including:
- Cash flow monitoring and projections
- Tax liability estimates
- Profit and loss reports
- Expense tracking
- Invoice management
This improves financial visibility and transparency, allowing you to monitor performance year-round, plan ahead for tax bills and make informed financial decisions using real-time data.
Powering Your Business with FreeAgent and Xero
FreeAgent and Xero are two of the most popular accounting software platforms for small businesses and the self-employed, and with good reason. They are both cloud-based, industry-standard platforms with a wide range of functionality and features, a mobile app, powerful automation and, importantly, they are HMRC approved for MTD.
We are proud Platinum Partners with both FreeAgent and Xero and provide them inclusive with all our accountancy packages, saving you up to £330 a year. If you’re preparing for MTD and are unsure which platform is right for your business, our accountants can help you choose, implement and manage the right software while keeping you fully compliant.
FreeAgent is suitable for sole traders, freelancers and contractors as well as limited companies. It has market-leading automation features, a wide range of integrations and a simple, intuitive interface that makes it easy to use even for those without accounting knowledge. It simplifies invoicing, expense management, tax projections and has a customisable dashboard so you can get your financial KPIs at-a-glance whenever you need them.
Xero provides many of the same features as FreeAgent but is generally more suited to businesses that are looking to grow, with scalability in mind as well as more advanced reporting and functionality. FreeAgent is more focused on simplicity and ease of use whereas Xero offers a wider range of integrations, more in-depth customisation and reporting options making it a better fit for more complex or larger businesses. It also offers stronger options for businesses with multiple users or more in-depth financial management requirements.
We will advise you which platform best suits your needs and get you efficiently onboarded, MTD-compliant and maximising the benefits of going digital with unlimited dedicated accountant support included with all our accountancy packages, including our MTD Comply and Complete packages designed for sole traders and landlords who have to comply now. Request a callback today to discuss your requirements with one of our expert accountants.
