Making Tax Digital (MTD) could cost businesses on average up to £465 in the first year, according to HMRC estimates. But every business has different accounting needs which could have an impact on the cost of transitioning to MTD.
In some cases, MTD-recognised accounting software is free while some options could cost up to £420 a year. But HMRC also claims cloud-based software could save business owners 20 to 39 hours annually on record keeping.
Find out how much MTD will cost your business and what you need to do before MTD is here.
How much will Making Tax Digital cost?
HMRC estimates an average ‘one-off’ transitional cost of around £280 to £350 per business. Plus an additional average annual cost of £110 to £115 for day-to-day use.
While the idea of quarterly reporting might feel daunting, the financial impact will vary depending on your business’s circumstances.
When does MTD start?
The shift to MTD for Self Assessment starts for sole traders and landlords from April 2026. But depending on your annual income, MTD will apply to your business from the following dates:
- April 2026: for those with an annual income of over £50,000
- April 2027: for those with an annual income over £30,000
- April 2028: for those with an annual income over £20,000
While the idea of quarterly reporting might feel daunting, the financial impact will vary depending on your business’s circumstances. Understanding these differences will help you budget for MTD.
The one-off transitional cost of MTD
HMRC estimates the initial setup cost for MTD is between £280 to £350. But that price isn’t just about the cost of new software, it also covers things like:
- time spent on learning new software and training staff
- initial setup of your new software
- minor hardware upgrades (for those who still rely on paper)
- any additional support from an accountant during the transition
Remember, these costs are generally tax-deductible against your business profits, which helps reduce the overall expense.
The ongoing cost of MTD
After the one-off setup, your main cost will be the annual fee for MTD-compatible software. Some simple accounting software is free while more advanced ones cost up to £35 a month.
This is why it’s important to think about your administrative needs – not the size of your turnover.
Your business likely has complex accounting needs if it:
- completes a large number of transactions
- regularly does global transactions
- handles large amounts of money that requires robust security
Below is a breakdown of the monthly costs you can expect based on the software tier you choose:
| Software tier | Typical monthly cost (excluding VAT) | What it’s for |
| Free options | £0 | For simple tax affairs – ideal for sole traders with a single income source or those who can access free versions through a business bank account. |
| Bridging software | £5 – £15 | Spreadsheet loyalists – for businesses that want to keep using their trusted spreadsheets. Bridging software simply creates the mandatory digital link to send your tax data to HMRC quarterly. |
| Mid-tier (QuickBooks, Xero, Sage) | £15 – £35 | A growing business – these comprehensive cloud platforms offer bank feed automation, professional invoicing, receipt scanning, and full reporting. They provide excellent value for time saved. |
| Premium packages | £35+ | Complex operations – for larger businesses that require multiple users on the platform. Plus inventory management, or high-volume transactions needing more advanced technology. |
Do you need bridging software?
MTD bridging software is a specific type of digital tool used to create a digital link between your business’s financial records (usually kept in a spreadsheet like Excel or Google Sheets) and HMRC’s systems for tax reporting.
It’s designed for businesses that want to comply with MTD rules without having to switch to cloud-based accounting.
But as HMRC pushes to make more processes fully digital, bridging software might only be a temporary solution. While it’s time-consuming to transfer your business records to new software, you’ll be saving time and potentially money in the long run.
Could MTD save businesses money in the long run?
While the upfront costs of MTD will be front of mind for many business owners, there could be long-term savings. HMRC reported that fully functional MTD software could save an average of 20 to 39 hours annually on record keeping.
And online accounting is often more accurate, which means there’s less chance of making a mistake when you’re doing your tax return. Which can save you from any potential fines from reporting errors.
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