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How to choose your perfect MTD accounting software
Choosing the right MTD accounting software is essential for more and more businesses as HMRC expands its Making Tax Digital requirements. So whether you're a sole trader, landlord or small business owner, the right system will ensure you're fully compliant with emerging regulations and save you from potentially costly penalties.
But with so many different business types and evolving MTD rules affecting different people at different times, it can be daunting to know whether you'll be affected and how best to prepare.
In this guide, we'll explain what MTD accounting software does, the key features to look for and how to choose the right platform depending on your individual needs.
What is MTD accounting software?
MTD stands for Making Tax Digital. MTD-compliant software lets you keep digital records and submit tax information directly to HMRC through approved software. Think of it as your software and HMRC speaking the same language — important figures and information are automatically transferred, reducing some of the burden on you.
MTD software allows you to record income and expenses digitally, store VAT records, submit VAT returns to HMRC, send the agency quarterly updates, maintain digital audit trails and generate financial reports.
If you're registered for self-assessment, earn income from self-employment or property, and your income is over £50,000, then you'll be affected from 6 April 2026.
In summary, MTD marks a shift away from paper or annual online returns to quarterly submissions and digital records.
Why choosing the right MTD accounting software matters
Not only is HMRC asking those earning over £50,000 to comply from 6 April 2026, but the earnings threshold will continue to drop over the next couple of years.
Failure to comply will result in penalties and fines, on top of those you could face for late filing. HMRC may also issue estimated tax bills rather than accurate ones based on your personal finances, which could be higher than you actually owe.
MTD accounting software can also help improve accuracy and speed up data entry because it communicates directly with HMRC, making tax returns slightly less daunting.
Key features to look for
HMRC recognition
This is one of the most important things when comparing MTD-compliant software. Don't just take a vendor's word for it, and be wary of ambiguous wording that doesn't explicitly confirm MTD compliance.
Software vendors that are above board will be officially recognised by HMRC and able to submit returns directly to the tax agency.
Digital record keeping
Remember that HMRC can ask you for evidence if something doesn't look right. You may be asked for receipts, invoices and other data from your most recent year, last year or even 20 years ago. Having all your data, and the relevant proof, in one place avoids confusion.
Clear audit trails can be useful when proving something to HMRC, and support for multiple tax years will help you work out what's what.
VAT returns
MTD-compliant software isn't just for sole traders and landlords. SMEs and larger companies that are VAT registered are also required to submit regular reports to HMRC.
Therefore, the software should be able to calculate VAT automatically, generate the relevant reports, send them to HMRC and keep a log for your records. Even if you're not VAT registered, consider VAT tools, because you may need them in future, and it will save the hassle of changing software providers later if you get it right now.
Bank feeds and automation
This is particularly handy if you've got a separate business bank account, because an integration or connector can automatically pull transactions — both incoming and outgoing — into your software.
From there, you can let automation handle categorisation and date or amount entry, or double-check it yourself. Just remember to flag any non-allowable expenses, as the software is unlikely to know.
Reporting and insights
MTD already generates reports for HMRC, but the best software also provides clear dashboards to monitor business health. Look for profit and loss summaries, VAT summaries and cash flow tracking, which can help identify trends early.
Integrations
We've already covered connecting your bank account, but MTD software can also integrate with third-party tools from the same vendor, such as payroll software, invoicing software and payment gateways.
Integrations reduce manual entry, saving time and lowering the risk of errors.
Security and data protection
Financial information says a lot about a company, and there's also sensitive data such as tax details, addresses and phone numbers linked to your account. Keeping this safe is essential.
Most tools are cloud-based, so look for encryption both in transit and at rest to protect your data. Enabling two-factor authentication and passkeys will also provide a barrier against unauthorised access.
How much does MTD accounting software cost?
For the most part, HMRC's MTD requirements are positive, helping to improve accuracy. However, you will need to invest in software, and this is rarely free.
Free options exist for basic users who need little more than transaction logging, but they can be stripped back and supported by adverts.
Paid plans are better suited to power users who need invoicing, receipt capture and additional tools. Expect to pay £10-£20 per month for mid-range options, and more for top-tier or corporate software.
Summary
Think of choosing the right MTD software as future-proofing your business against evolving UK tax regulations, as the Government introduces stricter requirements for more business owners.
MTD software communicates with HMRC to share quarterly reports and key details for more accurate tax bills, while also acting as a central hub for record-keeping and financial oversight.
You might have to pay for MTD accounting software, but the benefits often outweigh the costs. It's not just about compliance, it's also about improving efficiency.
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