How to Set Up Xero for Making Tax Digital — Step-by-Step UK Guide

You have chosen Xero. Now you need to get it working for Making Tax Digital before your next quarterly deadline. This guide walks through the full setup — from creating your account to submitting your first quarterly update — with no unnecessary steps.

Step 1: Start a Xero trial or subscribe

Go to xero.com/uk and start a free 30-day trial. No credit card is required to begin. Select Ignite as your plan — this is the entry-level plan and covers everything sole traders need for MTD.

During signup you will be asked for:

• Your name and email address
• Your business name and type (select "Sole trader")
• Your financial year start date (use 6 April for the standard UK tax year)

Step 2: Set up your organisation details

Once inside Xero, go to Settings → Organisation settings. Complete:

• Legal name: your name as it appears on HMRC records
• Trading name: your business name (if different)
• UTR number: your Unique Taxpayer Reference — HMRC needs this to match your Xero account to your tax record
• Financial year end: 5 April (UK standard tax year)
• Accounting basis: Cash or Accruals. Cash basis is simpler and is the default for most sole traders with turnover under £150,000.

Step 3: Connect to HMRC for MTD

This step authorises Xero to submit quarterly updates to HMRC on your behalf.

1. In Xero, go to Accounting → Reports → Tax → Making Tax Digital for Income Tax
2. Select Connect to HMRC
3. You will be redirected to the Government Gateway login page
4. Log in with your Government Gateway credentials
5. Authorise Xero — you will see a confirmation screen asking you to grant permission
6. Return to Xero — the connection status should now show as active

If you have not yet signed up for MTD ITSA through HMRC (separate from the Xero connection), you will need to do that first through your Government Gateway account. Search for "Sign up for MTD for Income Tax" on gov.uk.

Step 4: Connect your bank feed

A bank feed imports your transactions automatically, saving hours of manual entry.

1. In Xero, go to Accounting → Bank accounts
2. Click Add bank account
3. Search for your bank by name
4. Select Connect via bank feed (Open Banking)
5. You will be redirected to your bank's authorisation page
6. Log in and grant Xero permission to view your transactions
7. Return to Xero — transactions will begin importing (this may take a few minutes)

Once connected, your bank transactions appear in Xero each day automatically. You categorise each transaction to the correct income or expense category, and Xero builds your quarterly totals in the background.

Step 5: Enter opening balances (if switching mid-year)

If you are setting up Xero partway through the tax year — April 2026 onwards — you need to enter your income and expenses from 6 April to the date you started on Xero, so your quarterly figures are complete.

Two options:

Option A: Import bank transactions via CSV. Download a CSV of your bank transactions from 6 April from your online banking. Import it into Xero via Accounting → Bank accounts → Import statement. Then categorise the imported transactions.

Option B: Enter summary opening balances. If you already have quarterly totals from records you kept separately, enter them as a summary balance rather than individual transactions. Go to Settings → Chart of accounts and enter opening balances.

Option A gives you a complete transaction history. Option B is faster if your earlier records are well-maintained.

Step 6: Submit your quarterly update

Once the quarter closes and your transactions are categorised, submitting takes minutes.

1. Go to Accounting → Reports → Tax → Making Tax Digital for Income Tax
2. Select the relevant quarter
3. Review the income and expense summary Xero has compiled
4. Check the totals look correct
5. Click Submit to HMRC
6. Xero sends the data directly to HMRC and returns a confirmation reference

Save or screenshot the confirmation. Your Q1 submission (6 April – 5 July 2026) is due by 7 August 2026.

What happens after setup

Once Xero is connected and your bank feed is running, the ongoing effort is low. Categorise new transactions as they come in — takes a few minutes a week if you keep on top of it. Review and submit at each quarterly deadline. At year end, Xero generates your End of Period Statement and Final Declaration.

For a full view of Xero's features and how it compares to the alternatives, see our Xero review. If you are still deciding whether Xero is the right choice, our MTD Software Chooser takes five minutes and gives a personalised recommendation.