How to choose the right software for Making Tax Digital Accounting vs bridging software explained
Last editedDec 20254 min read
What is Making Tax Digital (MTD)?
Making Tax Digital (MTD) is HMRC’s program to transform the UK tax system into one of the world's most digital self assessment platforms. The core goal is to streamline reporting and reduce human errors. Whether you’re a sole trader or a landlord, you’ll now have to keep a digital record of your income and expenses using a Making Tax Digital compliant software.
You’ll no longer be able to use annual paper or manual online submission systems. Instead, you’ll need to do two things: keep a digital record (recording income and expenses in a compatible format) and submit them via a compliant accounting software or connect your spreadsheets to a bridging software - this software automatically collects your information from your spreadsheet and submits it in a compliant format to HMRC systems.When will I need to be compliant?
If your business is VAT-registered you will already be following the Making Tax Digital system, regardless of your turnover. You’ll be using compliant software to submit your records and VAT returns.
If you’re a sole trader (self-employed) or a landlord who usually submits a Self Assessment, you’ll need to start following the Making Tax Digital process soon (Making Tax Digital for Income Tax - MTD for ITSA). This includes using compliant software and submitting quarterly records.
The Making Tax Digital is being rolled out in three phases based on your incomer, each with different start dates and requirements:
| Feature | GoCardless | PayPal |
|---|---|---|
| Primary payment method | Direct bank payments (Direct Debit, ACH debit, etc.) and Instant Bank Pay (open banking). | Card payments (Visa, Mastercard, etc.), PayPal wallet balance, and PayPal Credit. |
| Ideal for | Recurring invoices, subscriptions, instalments, large one-off payments. | E-commerce checkouts, one-off online purchases, peer-to-peer transfers, businesses requiring instant payment. |
| Set-up | Customer authorises a one-time mandate to allow future collection. | Customer provides card details or uses their existing PayPal account/balance. |
Bridging software: The spreadsheet solution
If you’re a sole trader or landlord with simple affairs, the question isn't whether to switch Making Tax Digital accounting software, but whether you can keep using your trusted spreadsheets. This is where bridging software comes in.
What is bridging software?
Making Tax Digital bridging software is a tool that provides the required digital link between your records (like an Excel or Google spreadsheet, or an older desktop package) and HMRC’s system. They’re specifically designed to minimise disruption, allowing you to continue managing your accounts in a familiar way.
Bridging software imports your quarterly income and expense totals for Income Tax for Self Assessment) directly from your spreadsheet and submits them to the HMRC. This ensures the transfer of data is digital and satisfies the compliance rules.
The difference between bridging software for VAT and Income Tax Self Assessment
Making Tax Digital for VAT Bridging Software: This solution is widely used and highly effective for VAT-registered businesses who only need to submit nine summary figures quarterly.
Making Tax Digital for Income Tax Self Assessment: While some bridging tools exist for sole traders and landlords who normally submit a Self Assessment, they are less common and more complex. Making Tax Digital requires four cumulative quarterly updates, an End of Period Statement and a Final Declaration, generally making comprehensive accounting software a simpler, safer long-term choice for sole traders and digital landlords.
Compatibility concerns
A common query is whether legacy software is supported, specifically if bridging software is compatible with Excel 2007. Most HMRC approved Making Tax Digital bridging software solutions today, such as Easy MTD VAT or AbraTax, are compatible with old Excel files (.xls) and the modern formats (.xlsx). They work by either using an Excel Add-in (which may require later versions like Excel 2013+) or by importing the final summary figures via a web portal. For best results, we recommend moving your data to a robust MTD spreadsheet template that works with a modern solution.
Pros and cons of bridging software
How to find the right bridging software for you:
| Pros | Cons |
|---|---|
| Low cost compared to full MTD cloud accounting solutions. | Manual data risk remains (e.g., input errors in the spreadsheet). |
| Familiarity for long-time spreadsheet users. | Doesn't handle digital record keeping required for ITSA (receipt capture, bank feeds). |
| Quick solution for basic VAT compliance. | Short-term fix that lacks automation and long-term business intelligence. |
The HMRC has built a great tool to help you find the right software for your business. Follow the steps and add the details about your situation, and then when you get given the list of results, on the left hand side under “Type of software” simply click “Software that connects to your records (bridging software)”.
Accounting software
If your business is growing and your records are more complicated, transitioning to a full, accounting platform might be the best option for you. These types of software provide the greatest benefits, ensuring end-to-end compliance and automation.
Must-have features of Making Tax Digital compatible software
Making Tax Digital-compliant software must do the following:
Direct API submission: The software must connect using an application programming interface (API) to submit either VAT returns for VAT-registered businesses and your quarterly updates for Making Tax Digital for Income Tax Self Assessment, directly to HMRC - without any external bridging software.
Digital record keeping: Features like bank feed integration and receipt scanning to ensure all records are created and stored digitally.
Automated quarterly filing: With Making Tax Digital for Income Tax Self Assessment, the software must automate the calculation and submission of your four required quarterly updates and the Final Declaration.
Real-time liability: Software must give you a live estimate of your tax position throughout the year, removing year-end surprises.
The big three compared
We break down the leading Making Tax Digital-compliant software providers that are built specifically for Making Tax Digital:
| Provider | MTD focus | Key advantages |
|---|---|---|
| Xero MTD | User experience and automation | Widely regarded as the best for modern cloud features (storing everything online), logical and easy to use, and connect directly with your bank account to make reconciliation seamless reconciliation. |
| QuickBooks MTD | Features and scalability | Excellent for businesses that need detailed tracking and robust reporting. Strong, user-friendly mobile app with good support for small businesses, like sole traders. |
| Sage MTD | Stability and enterprise linkage | A trusted name, offering scalable solutions from its basic online cloud service to more complex desktop integrations (Sage 50), preferred by established and growing businesses. |
Choosing the right software for you
For sole traders: You’ll typically need simplicity and low cost. Look for packages that offer easy receipt capture, mobile access, and connection to your bank to keep administrative time to a minimum.
For landlords: You’ll require specialist functions, such as property-by-property income (if you have more than one rental income) and expense tracking, tenant management, and tracking compliance certificates. Dedicated property software (like Landlord Vision or Hammock) or a general package with a strong landlord module (like QuickFile) often have the features you’ll need.
Free and budget-friendly solutions
The myth of HMRC free software
Many users search for HMRC free Making Tax Digital software or free software for sole traders. HMRC doesn’t provide any Making Tax Digital software itself; rather they only recognise products made by commercial developers. When a tool is advertised as “free Making Tax Digital software”, it usually means one of two things:
A free compliant software tier that offers basic compliance features.
A free bridging tool (which still requires you to keep your primary digital record elsewhere).
Free MTD software options for sole traders
Genuine free options are available and provide excellent value for small, non-VAT registered businesses:
Clear Books Free: This is a comprehensive,compliant software offering that allows sole traders and landlords to record income and expenses, link bank accounts, and submit quarterly updates.
Pandle Free: Offers full double-entry bookkeeping, bank feeds, and VAT submissions (though Pro features are required for full automation).
Sage Accounting Individual (Free): A simplified tool for sole traders with a single income source, focusing on digital record keeping and preparation for MAking Tax Digital.
You can also filter by free tools in the HMRC’s software finder tool.
Achieving compliance on a budget
If the free options are too limited, switching to a low-cost, full accounting software is the most reliable way to get compliant. Many providers offer deeply discounted first-year rates to transition users from spreadsheets. Investing a small monthly fee in a dedicated compatible software often saves significant time and reduces the risk of penalties far outweighing the cost, and you may even be able to claim this cost as an expense.
Making your final choice
The transition to Making Tax Digital—whether for VAT or Income Tax—is mandatory, but it’s an opportunity. Embrace it to gain powerful, real-time financial control.
Your checklist for compliance
Determine when you need to be compliant: Based on your qualifying income (gross income before expenses) make sure you’re ready by the right date.
Assess your needs: Do you need a simple bridging software to connect your existing spreadsheet, or do you have more complex needs that require a full cloud accounting package to manage all aspects of your business?
Prioritise features you need:
Sole Traders: Do you seek simplicity, low-cost/free tiers, and mobile receipt capture?
Digital Landlords: Do you require property-specific functions, such as dedicated expense tracking and tenancy management?
Choosing the right Making Tax Digital-compliant software now will not only keep you compliant but will also give you better real-time financial insight, turning a regulatory burden into an opportunity for improved business management.
