A Plain-English Guide to Setting Up Online Accounting
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If your records live in a spreadsheet, a shoebox, or nowhere at all, moving to online accounting is the single biggest step you can take toward knowing where your business actually stands. This guide walks through what online accounting is, which software fits which business, and what HMRC now legally requires you to have in place.
Why online accounting matters for your business right now
Online accounting is no longer optional for many UK businesses. From 6 April 2026, HMRC requires sole traders and landlords with income over £50,000 to use Making Tax Digital-compatible software for their income tax records. That means submitting quarterly updates to HMRC digitally, using approved software, four times a year before your final tax return.
Despite this, fewer than 30 percent of eligible taxpayers had registered for MTD for Income Tax as of April 2026. If you are in that group and earning over £50,000, you are already behind. The good news is that catching up is straightforward with the right software and support in place.
HMRC will not apply penalties for late quarterly updates in the first tax year (2026-27), but penalties still apply for late tax returns and late tax payments. That grace period does not mean the requirement has been delayed. You still need compliant software in place now.
Where most people go wrong with online accounting
The most common mistake is choosing software based on price alone, setting it up incorrectly, and then either abandoning it or trusting numbers that are wrong. A cheap subscription means nothing if your VAT returns are being calculated from miscategorised transactions.
Picking software that does not match your situation
Not every online accounting platform handles every business type well. QuickBooks Online and Xero both support MTD for VAT and MTD for Income Tax, but their pricing, interface, and integrations differ. FreeAgent is built specifically for freelancers and contractors and is available free through some business bank accounts. Choosing the wrong one means either paying for features you do not need or missing features you do.
Assuming the software does the accounting for you
Online accounting software connects to your bank and categorises transactions automatically, but it does not make judgements. It cannot tell HMRC-allowable expenses apart from personal purchases. It cannot spot a missed invoice or flag that your VAT return contains an error. A 2024 survey found accountants planning a 50 percent increase in tech investment, precisely because software alone does not replace professional oversight.
“Most of my clients come to me having paid for software they stopped using six months in. The problem was never the software. It was having no one to check the numbers or ask when something looked wrong.”
What to do, step by step
Setting up online accounting properly takes less time than most people expect. The three steps below apply whether you are starting fresh or trying to sort out months of backlog.
- Choose MTD-compatible software that fits your business type. Sole traders with straightforward income often find FreeAgent or QuickBooks Simple Start sufficient. Limited companies typically need QuickBooks Online, Xero, or Sage. If you use subcontractors under CIS, check that your chosen platform handles CIS deductions before signing up. A detailed comparison of MTD-compatible software options was updated in April 2026 and is worth checking before committing.
- Connect your business bank account and set your chart of accounts. Most platforms allow you to link your bank feed directly, which pulls in transactions automatically. Spend an hour reviewing the default expense categories and adjusting them to reflect how your business actually operates. Getting this right at the start saves hours of correction later.
- Set a recurring monthly task to review your transactions, reconcile your accounts, and check your VAT position. Online accounting only works if the records are kept current. A quarterly catch-up before each MTD submission deadline is the minimum. Monthly is better. If that sounds like too much to manage yourself, this is the point at which working with an accountant pays for itself.
If you have a backlog, do not let it stop you from starting. Most accountants, including me, have helped clients untangle 12 to 18 months of unrecorded transactions. It is a normal starting point, not a disqualifying one.
Costs and what to expect
Online accounting software typically costs between £12 and £40 per month depending on the platform and plan. Some business bank accounts include FreeAgent free of charge. That subscription cost is only part of the picture. The real cost comparison is between doing it yourself and having a qualified accountant handle it for you on a fixed monthly fee.
| Option | Pros | Cons |
|---|---|---|
| DIY online accounting | Low monthly software cost, full visibility over your records | High risk of miscategorisation, errors in VAT or tax returns, and no one checking your work |
| Accountant-managed online accounting | Accurate records, deadlines tracked, MTD submissions handled, tax minimised | Monthly or annual fee on top of software cost |
How to get started today
The fastest way to move forward is to make one decision and act on it. You do not need to have everything perfect before you begin. You need a platform, a connected bank feed, and either the time to maintain it yourself or someone qualified to do it for you.
- Identify which MTD-compatible software suits your business type and sign up for a free trial. QuickBooks Online, FreeAgent and Xero all offer trial periods. Connect your business bank account on day one.
- Book a free call with me to talk through your situation. I will tell you honestly whether you need an accountant, which platform I would recommend for your setup, and what a fixed monthly fee would cover. There is no obligation and no sales pitch.
Ready to sort your online accounting?
I offer a fully managed online accounting service covering software setup, MTD submissions, VAT returns, bookkeeping and year-end accounts on a fixed monthly fee with no tie-in. Book a free 20-minute call and I will tell you exactly what is involved and what it costs.
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AAT qualified accountant based in Uttoxeter. Personal, one-to-one accounting for small businesses and sole traders across the UK.