Business
TL;DR
UK small businesses required to submit VAT returns under Making Tax Digital (MTD) must use HMRC-compatible software. MTD for Income Tax Self Assessment (MTD ITSA) extends quarterly digital reporting to self-employed individuals and landlords with income above £50,000 from April 2026, and above £30,000 from April 2027. Choose software that is listed on HMRC's approved MTD software list and suits your transaction volume and accountant's preferred platform.
Accounting software for UK small businesses has evolved substantially since HMRC's Making Tax Digital programme began mandating digital VAT records in 2019. The market is now dominated by cloud-based platforms that integrate with bank feeds, payroll services, payment gateways and HMRC's own APIs. The key compliance requirement for most small businesses is MTD for VAT, which has applied to all VAT-registered businesses since April 2022, regardless of turnover.
The next major MTD milestone is MTD for Income Tax Self Assessment, which begins in April 2026 for self-employed individuals and landlords with qualifying income above £50,000, and extends to those above £30,000 from April 2027. Businesses not yet using compliant software need to act before these deadlines. This guide covers how to evaluate accounting software for UK compliance, the key features to look for, and what questions to ask before committing to a subscription.
Key facts (2026)
- MTD for VAT has applied to all VAT-registered businesses since April 2022; records must be kept digitally and returns submitted via MTD-compatible software (HMRC).
- MTD for Income Tax Self Assessment (MTD ITSA) applies from April 2026 to self-employed individuals and landlords with gross income above £50,000 (HMRC, 2024 announcement).
- HMRC maintains a list of MTD-compatible software at gov.uk; only software on this list can be used to file MTD returns directly to HMRC.
- Under MTD ITSA, affected businesses must submit quarterly updates to HMRC (rather than one annual return) plus an end-of-period statement and final declaration (HMRC, MTD ITSA regulations 2021, updated 2024).
- Cloud accounting software subscriptions for sole traders and small limited companies typically range from £10 to £40 per month depending on features and user numbers.
MTD compliance: what accounting software must do
To be MTD-compatible, software must be able to connect directly to HMRC's API and submit VAT returns (for MTD VAT) or quarterly updates and end-of-period statements (for MTD ITSA) without any manual re-keying of data. HMRC's "digital links" requirement means that all transfers of data within your accounting records - from source documents through to the return - must be digital; cutting and pasting figures into a spreadsheet breaks the digital link and puts you out of compliance. HMRC's approved software list at gov.uk is the definitive reference; only software on this list can file MTD returns directly.
Key features to evaluate beyond MTD compliance
Bank feed integration allows the software to import transactions automatically from your business bank account, matching them against invoices and reducing manual data entry. Invoicing features include customisable templates, automatic payment reminders and online payment links. Payroll integration or a built-in payroll module is important if you have employees; Real Time Information (RTI) payroll submissions to HMRC must also be made via HMRC-approved software. Receipt capture via a mobile app reduces the physical paperwork burden. Reporting capabilities - P&L, balance sheet, aged debtors and creditors - should be evaluated against your actual reporting needs rather than feature checklists.
Pricing models: subscriptions, tiers and add-ons
Most UK cloud accounting platforms use a tiered subscription model. Entry-level tiers - suitable for sole traders with straightforward accounts - typically include invoicing, bank feeds and MTD VAT filing at £10 to £15 per month. Mid-tier plans add features such as payroll, multi-currency support and project tracking at £20 to £35 per month. Higher tiers serve growing businesses with more complex reporting needs. Watch for add-on costs: payroll is often a separate module with a per-employee per-month charge. Some platforms charge for additional user seats. Evaluate the total monthly cost for your specific use case, not the headline entry price.
| Feature | Sole trader priority | Ltd company priority |
|---|---|---|
| MTD VAT filing | Essential (if VAT-registered) | Essential (if VAT-registered) |
| MTD ITSA readiness | Essential (from Apr 2026) | N/A (Corp Tax, not ITSA) |
| Payroll (RTI) | Only if employing staff | Essential if employing |
| Corporation Tax filing | Not applicable | Useful (via accountant) |
Working with an accountant: platform compatibility
If you use an accountant or bookkeeper, check which platforms they work with before choosing software. Most accountancy firms in the UK specialise in one or two cloud platforms and can offer better support - faster query resolution, automated data sharing and reduced year-end preparation costs - when you use the same software they do. Some platforms charge accountants a wholesale price and pass the saving on to their clients; ask your accountant whether they can offer a discounted subscription through their practice's partner programme. Migrating between platforms mid-year is possible but creates additional reconciliation work, so getting the initial choice right matters.
Free and low-cost options for micro-businesses
HMRC's free MTD bridging software allows businesses to file MTD VAT returns by linking an existing spreadsheet to HMRC's API without a full accounting subscription. This satisfies the MTD VAT requirement but does not provide bank feeds, invoicing or reporting features. For businesses with very low transaction volumes, a bridging software approach plus a simple spreadsheet ledger may be sufficient. For businesses moving to MTD ITSA from April 2026, dedicated MTD ITSA-compatible software will be required; HMRC's approved software list will show which tools support this from launch.
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Frequently asked questions
Do I need accounting software if I am not VAT-registered?
If you are below the VAT registration threshold (£90,000 from April 2024) and not voluntarily VAT-registered, MTD VAT does not apply. However, if your gross income from self-employment or property exceeds £50,000, MTD ITSA will apply from April 2026, requiring MTD-compatible software for quarterly updates. Even below the MTD thresholds, accounting software can save significant time compared with manual records.
Can I use a spreadsheet for MTD compliance?
Not directly. HMRC requires returns to be filed via API-connected software. You can maintain records in a spreadsheet and use MTD-compliant bridging software to connect to HMRC's API, provided all transfers of data within your records remain digital (no manual re-keying). HMRC's list of approved bridging software is on gov.uk.
What is the penalty for not using MTD-compatible software?
HMRC's new penalty regime (in force from January 2023 for VAT, extended to income tax from April 2026) applies points-based penalties for late submissions. Using non-compliant software and therefore failing to file correctly is treated as a failure to submit. Penalties accumulate as points and can result in financial charges. HMRC has stated it will apply a "soft landing" approach for genuine technical failures but not for systematic non-compliance.
Can I switch accounting software mid-year?
Yes. Most platforms allow you to import opening balances and historical data from a previous system. Switching mid-year requires care to ensure VAT returns for the transition period are filed correctly, with no gaps or duplication. Your accountant should advise on the cleanest cut-over point, which is often at a VAT period boundary or the start of a new financial year.
Does MTD ITSA apply to landlords?
Yes, if your gross rental income exceeds £50,000 per year. From April 2026, you must keep digital records and submit quarterly updates to HMRC for property income. The quarterly updates cover income and expenses; a final declaration is submitted after the tax year end. You will need MTD ITSA-compatible software to file these returns directly.
How we verified this guide
MTD mandation dates and threshold figures were confirmed against HMRC's official MTD ITSA guidance updated in 2024. The MTD compatible software list reference was confirmed at gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-income-tax. VAT registration threshold was verified against HMRC's 2024/25 and 2025/26 threshold publications. This guide was compiled in May 2026.
Primary sources
- HMRC - Making Tax Digital for Income Tax guidance
- HMRC - MTD compatible software list
- HMRC - VAT registration thresholds
- HMRC - Making Tax Digital for VAT guidance
Last reviewed: May 2026.