More than half of small businesses have work to do before the first Making Tax Digital for Income Tax deadline, which is very quickly approaching next month, according to new research from Lloyds.
The bank found that 55% are not prepared for the new rules. Based on HMRC estimates, that could mean around 475,000 sole traders and landlords who fall within the first stage of the scheme have not completed their preparations.
But before we get into the stats, let’s go over what Making Tax Digital is…
What Is Making Tax Digital And Who Is It For?
Making Tax Digital for Income Tax is HMRC’s new way for sole traders and landlords to complete Self Assessment. Instead of keeping paper records and filing everything at the end of the tax year, people within the scheme need to keep digital records using compatible software and send quarterly updates to HMRC.
The first stage applies to people who are already registered for Self Assessment and whose qualifying income from self employment, property income, or both, was more than £50,000 on their 2024 to 2025 tax return. They started using Making Tax Digital from 6 April 2026.
The programme will reach more people over time; anyone with qualifying income above £30,000 will join from April 2027, and the threshold will come down to more than £20,000 from April 2028.
HMRC says taxpayers will continue to submit one tax return each tax year and pay their tax bill as they do now. The difference is that they must use compatible software, keep digital records of income and expenses, send quarterly updates every three months and complete their tax return through that software.
How Close Is The First Deadline?
The first quarterly update must reach HMRC by 7 August, which is in a couple of weeks, for those using standard update periods. That date is now only weeks away, which makes Lloyds’ findings particularly interesting.
The research found that 55% of small businesses have not finished preparing for the new system. Using HMRC’s estimate of the number of sole traders and landlords within the first stage of Making Tax Digital, Lloyds says that could amount to around 475,000 businesses.
Ramki Sankaranarayan, Head of Business Banking at Lloyds, said, “Making Tax Digital represents one of the biggest administrative changes many sole traders will have experienced for years. Our research suggests that while businesses recognise the benefits of digital record keeping, many are still working through what they need to do before the first submission deadline.”
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Are There Any Benefits Once People Get Started?
The Lloyds research was not entirely about unfinished preparation. It also asked people who have already started using digital tax management about their experience.
Of those preparing for the first submission, 40% said the move had helped them become more organised and 28% said it had reduced last minute tax stress.
People also seem to be keen on managing everything in one place. Lloyds found that 93% would find it useful to handle tax records, deadlines and administration through their banking app or online banking.
Sankaranarayan said, “With small business owners already balancing multiple demands on their time, simplicity matters. That’s why we’ve built HMRC recognised Making Tax Digital for income tax functionality directly into eligible Lloyds Business Accounts at no extra cost, helping customers manage tax administration alongside their everyday banking.”
What Do You Need To Do Before 7 August?
HMRC says the first task is checking if Making Tax Digital applies to you. If it does, you need compatible software because HMRC does not supply it.
The software must be authorised so it can connect with HMRC. Sole traders and landlords sign in using the same user ID and password used for Self Assessment, complete any identity checks if needed and give permission for the software to connect. That authorisation must be renewed every 18 months.
People also need to check that the accounting period in their software is correct before sending the first quarterly update. HMRC says this is important because the accounting period cannot be changed after the first quarterly update has been submitted.
Digital records must contain details such as the amount, the date income was received or an expense occurred, and the correct category for each item. The software then uses those records to prepare the quarterly update.
HMRC says quarterly updates are summaries of income and expenses, not tax returns. After the fourth quarterly update has been sent, taxpayers complete and submit their annual tax return through the same software before the usual 31 January deadline.
So, for anyone who has left preparations until the last minute: time is ticking. The first quarterly submission is due on 7 August, and getting the software ready before then could make that date a lot less stressful.
