Making Tax Digital (MTD) for Payroll Explained

Making Tax Digital (MTD) is a government initiative that requires self-employed individuals to digitise bookkeeping, financial reports, and tax returns using compatible software. MTD doesn’t currently apply to payroll (PAYE), but there is a separate digital system designed for payroll submissions.

In this guide, we’ll explain which digital reporting applies to payroll and how it works.

MTD and payroll – In summary

• Making Tax Digital does not apply to payroll. Instead, payroll operates under its own digital reporting system called Real Time Information (RTI), which requires employers to report their employees’ information as they are processed.

• MTD focuses on VAT and Income Tax, with quarterly updates for Income Tax. RTI focuses on employment income (PAYE), with submissions required on or before each payday. Both are government digital initiatives that serve different tax purposes.

• While Making Tax Digital aims to digitise the Income Tax self-assessment and VAT processes, RTI provides HMRC with real-time information on PAYE. MTD impacts VAT-registered businesses and sole traders, and employers are most impacted by RTI.

Does Making Tax Digital apply to payroll?

Making Tax Digital doesn’t currently apply to standard payroll (PAYE). It’s a separate government scheme focused on Value Added Tax (VAT) and Income Tax (IT) for sole traders and landlords. Employment income (PAYE) is specifically excluded from the quarterly update reporting in MTD for IT.

What is Making Tax Digital?

Making Tax Digital is the government’s initiative to shift away from traditional annual tax returns in favour of digital record-keeping and quarterly updates. It aims to modernise the UK tax system, reduce errors, and streamline tax submissions for HMRC and taxpayers.

The current scope for MTD is as follows.

• MTD for VAT: Making Tax Digital is compulsory for all VAT-registered businesses, requiring digital record-keeping and submissions of VAT returns from HMRC-recognised software.

• MTD for Income Tax (IT): From 06 April 2026 the scheme applies to sole traders and landlords with qualifying income over £50,000 in the tax year 2024-25. These individuals must keep digital records of income and expenses and send quarterly updates to HMRC from MTD-compatible software.

How is payroll reported to HMRC?

Payroll is exempt from MTD, but it operates under a separate digital reporting known as Real Time Information (RTI). Introduced in 2014, RTI requires employers to report PAYE information electronically to HMRC “on or before” every payday, rather than annually.

Employers must submit a Full Payment System (FPS) detailing employee earnings, Income Tax deductions, and National Insurance contributions, alongside an Employer Payment Summary (EPS) if required. As an employer, you must ensure your payroll software is compatible with HMRC’s RTI system.

RTI benefits both employers and HMRC by ensuring employees receive the correct pay, improving tax code accuracy, and allowing for more efficient tax reporting. 

How to keep your payroll HMRC-compliant

Compliance for payroll, specifically with RTI, goes beyond ensuring accurate calculations and payments. It’s just as crucial to consider the method and software you’re currently using. 

• Use reliable software. Integrated and reliable payroll software is your best defence against common pitfalls. Consider using a HMRC-recognised software that is compatible with RTI to manage payroll and submit reports.

• Submit FPS accordingly. Full Payment Submission (FPS) is the backbone of your RTI reporting. File an FPS on time every time you pay employees, regardless of whether you pay weekly or monthly.

• Don’t forget to file EPS. An Employer Payment summary (EPS) details any adjustments to HMRC that can’t be included in your regular FPS, such as sick pay. Always submit an EPS by the 19th of the following month to reclaim statutory payments.

• Stay accurate and up to date. RTI is most useful for providing a live snapshot of your payroll details to HMRC. Always keep accurate digital records of employee earnings, deductions, contributions, and other relevant information.

Submitting on time isn’t just good practice – it’s essential for staying compliant. Inaccurate or late submissions, or general non-compliance with RTI rules, could incur fines and ultimately disrupt your business. 

How does MTD compare to RTI?

Both Making Tax Digital (MTD) and Real Time Information (RTI) are HMRC digital initiatives, but they focus on different tax areas and operational patterns. 

Making Tax Digital for payroll FAQs

Will MTD ever apply to payroll? 

While HMRC’s digital transformation is ongoing, there are no current plans for Making Tax Digital to apply to payroll. Instead, payroll is already digitised through Real Time Information (RTI), which requires employers to submit information to HMRC electronically.

What software do I need for payroll?

You need HMRC-recognised payroll software that is compatible with Real Time Information (RTI) to manage your payroll and submit the required information to HMRC. Software such as QuickBooks can help you stay compliant with HMRC, manage wages, track time, automate payments, integrate with your accounting and connect to a range of pension providers.

What are the penalties for late payroll submissions?

Late payroll submissions, including Full Payment Submissions (FPS) or Employer Payment Summaries (EPS), could incur monthly, tiered penalties. Fines range from £100 to £400 per month, depending on company size. If you run more than one PAYE scheme, you could be charged penalties for each.

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