The best accounting software for micro entities in the UK right now are Xero, QuickBooks, FreeAgent, Sage, and QuickFile — all of which are HMRC-recognised and compatible with Making Tax Digital (MTD). If budget is a priority, QuickFile and HMRC’s own free tool are the strongest no-cost options for sole traders with simple accounts.
For limited companies and growing micro businesses that need VAT, payroll, and full bookkeeping, Xero and Sage provide the most complete feature sets. This guide breaks down every option so you can pick the one that fits your business without overpaying or missing a compliance deadline.
What is a Micro Entity and What Does It Need From Accounting Software?
Under UK company law, a micro entity is a company that meets at least two of the following three conditions:
- Turnover of no more than £1M
- A balance sheet total of no more than £500,000
- No more than 10 employees
Micro entities can file simpler accounts with Companies House under the micro-entity regime, which reduces the level of detail required compared to standard small company accounts. But they still need to keep proper financial records, pay Corporation Tax, submit VAT returns if registered, and from April 2026 onwards, comply with MTD for Income Tax if they also have self-employment or property income above the threshold.
For sole traders and self-employed people — who are not limited companies but are often described as micro businesses — the requirements are similar: accurate records, Self Assessment returns, VAT if applicable, and now quarterly MTD updates.
What this means in practice is that your accounting software needs to handle day-to-day bookkeeping, connect to HMRC for digital submissions, and ideally link directly to your bank account so you are not manually entering every transaction.
From 6 April 2026, sole traders and landlords with gross income above £50,000 must use HMRC-recognised MTD software to submit quarterly updates instead of a single annual return. If your income is between £30,000 and £50,000, the same requirement applies from April 2027. It is worth getting the right software in place now rather than rushing before a deadline.
What Does HMRC-Recognised Accounting Software Actually Mean?
A common misconception is that HMRC approves or endorses specific software products. That is not quite right. ‘HMRC-recognised’ means the software has been technically tested to work with HMRC’s MTD systems and can submit digital returns directly to HMRC through the API. It confirms the software is compatible — not that HMRC recommends it over any other option.
HMRC maintains a published list of recognised MTD-compatible software on gov.uk. Any software on that list can be used to keep digital records and submit quarterly updates and final declarations. Any software not on that list cannot be used for MTD submissions, and returns made through unrecognised software may be rejected.
The important thing to check before choosing software is that it is on the official HMRC list for the type of MTD submission you need — MTD for VAT, MTD for Income Tax, or both.
Best Accounting Software for Micro Entities and Micro Businesses in the UK
The table below covers the most widely used options in 2026, including which are HMRC-recognised and whether a free version is available:
| Software | Best For | HMRC-Recognised? | Free Option? | Starting Price |
|---|---|---|---|---|
| Xero | Micro entities, sole traders, LTD companies | Yes — MTD VAT & ITSA | No | ~£15/month |
| QuickBooks | Sole traders, small LTD companies | Yes — MTD VAT & ITSA | No (30-day trial) | ~£8/month |
| FreeAgent | Freelancers, contractors, micro businesses | Yes — MTD VAT & ITSA | Free via NatWest/RBS | ~£12/month |
| Sage | Growing micro entities, those needing payroll | Yes — MTD VAT & ITSA | No (30-day trial) | ~£16/month |
| QuickFile | Sole traders, landlords, micro businesses | Yes — MTD ITSA | Yes — permanently | Free / paid tiers |
| Zoho Books | Micro businesses under £35k turnover | Yes — MTD VAT | Yes — under £35k/yr | Free / £12/month |
| Clear Books | Small LTD companies, VAT-registered businesses | Yes — MTD VAT & ITSA | Free tier available | Free / paid tiers |
| HMRC Tool | Sole traders with simple, single-source income | Yes — HMRC-built | Yes — fully free | Free |
Prices as of July 2026. Most providers offer introductory discounts of 50–90% for the first three to six months.
Xero — Best Overall for Micro Entities and Limited Companies
Xero is the most widely used cloud accounting platform among UK small businesses and their accountants. It covers invoicing, expense tracking, bank reconciliation, VAT returns, payroll, and MTD submissions in one place. It has the largest network of UK accountants and bookkeepers, which means if you work with an accountant, there is a good chance they already know the system.
- Best for: Micro entity limited companies, VAT-registered businesses, those working with an accountant
- MTD: Recognised for both MTD VAT and MTD for Income Tax
- Price: From around £15 per month, with introductory discounts available
QuickBooks — Best for Sole Traders Who Want Simplicity
QuickBooks is well suited to sole traders and self-employed people who want something straightforward. It offers bank feeds, mileage tracking, estimated tax calculations, invoicing, and direct HMRC submission. The Self-Employed plan is aimed specifically at people with a single income source and minimal complexity.
- Best for: Sole traders, freelancers, people new to accounting software
- MTD: Recognised for MTD VAT and MTD for Income Tax
- Price: From around £8 per month, with introductory offer available
FreeAgent — Best Value If You Bank With NatWest or RBS
FreeAgent is a strong option for micro businesses and freelancers. It handles invoicing, expenses, payroll, Self Assessment, and MTD VAT. What makes it stand out is that it is available free of charge to NatWest, Royal Bank of Scotland, and Ulster Bank business account holders. If you already bank with one of those providers, FreeAgent costs you nothing.
- Best for: Freelancers, contractors, NatWest or RBS business account holders
- MTD: Recognised for MTD VAT and MTD for Income Tax
- Price: Free via NatWest/RBS/Ulster Bank; around £12 per month otherwise
Sage — Best for Micro Entities That Need Built-In Payroll
Sage is one of the longest-established accounting software brands in the UK and has a strong reputation among small businesses that need payroll as part of the same system. Its entry-level plan covers invoicing, bank reconciliation, and VAT returns. The mid-tier plans include payroll and more advanced reporting.
- Best for: Micro entities with employees, those who want payroll and accounts in one place
- MTD: Recognised for MTD VAT and MTD for Income Tax
- Price: From around £16 per month, with introductory discounts available
QuickFile — Best Free Option for Small Businesses and Landlords
QuickFile is permanently free for small businesses and landlords who meet the usage criteria. It offers full bookkeeping, invoicing, bank feeds, and MTD for Income Tax compliance including quarterly updates and final declaration support. It is a particularly strong choice for sole traders, freelancers, and landlords who do not need the bells and whistles of a premium platform.
- Best for: Budget-conscious sole traders, landlords, small businesses
- MTD: Recognised for MTD Income Tax — supports quarterly updates and final declaration
- Price: Permanently free within usage limits; paid tiers for higher usage
What is the Best Free Accounting Software for Micro Businesses?
If you want to keep costs to a minimum, these are the strongest no-cost options available in the UK right now:
- HMRC’s own free tool: Available directly on gov.uk. It is built specifically for sole traders and landlords with simple, single-source income. It handles digital record-keeping and quarterly MTD updates. No bank feeds, no invoicing, and no accountant access — but for the simplest cases, it does the job at zero cost.
- QuickFile: Permanently free for businesses within the standard usage limits. Full bookkeeping features, bank feeds, MTD Income Tax support, and multi-income source handling. One of the most capable free options available.
- Zoho Books: Free for businesses with turnover under £35,000 per year. Covers invoicing, expense tracking, and bank reconciliation. HMRC-recognised for MTD VAT. A solid entry point for very small businesses.
- FreeAgent (via bank): Free if you hold a NatWest, RBS, or Ulster Bank business account. More feature-rich than the other free options and suitable for businesses that need invoicing, Self Assessment, and MTD in one place.
- Clear Books: Offers a free tier with basic bookkeeping and VAT functionality for very small businesses. Award-winning platform with a clear upgrade path as your business grows.
HMRC does not provide its own paid accounting software and does not endorse any specific private software product. ‘HMRC-approved’ is sometimes used loosely — the correct term is ‘HMRC-recognised’, which simply means the software has been verified to connect with HMRC’s MTD systems. Always check the official gov.uk recognised software list before committing.
What is Making Tax Digital and Why Does It Matter for Your Software Choice?
Making Tax Digital (MTD) is HMRC’s programme to move the UK tax system entirely onto digital platforms. It started with VAT in 2019 and is now rolling out to Income Tax. For micro entities and self-employed people, this means:
- You must keep digital records — no more paper ledgers or basic spreadsheets without a digital link
- You must submit quarterly updates to HMRC showing your income and expenses for that period
- You must use HMRC-recognised software to do this — no recognised software means no compliant submission
The rollout for Income Tax follows a phased schedule based on income level:
| From Date | Who Must Comply | Income Threshold |
|---|---|---|
| 6 April 2026 | Self-employed and landlords | Gross income over £50,000/year |
| 6 April 2027 | Self-employed and landlords | Gross income over £30,000/year |
| 6 April 2028 | Self-employed and landlords | Gross income over £20,000/year |
| TBC | Limited companies (Corporation Tax) | Date not yet confirmed by HMRC |
Source: HMRC — Making Tax Digital for Income Tax rollout schedule (current as of July 2026)
The quarterly deadlines for submitting updates are 7 August, 7 November, 7 February, and 7 May each year. Missing these can result in penalty points under HMRC’s new points-based penalty system, so having software that prompts you or submits automatically is a practical advantage, not just a convenience.
Which Accounting Software Works Best for Micro Entity Limited Companies?
Micro entity limited companies have slightly different needs from sole traders. In addition to bookkeeping and VAT, they need software that can handle:
- Corporation Tax calculations and filing (or export to an accountant for filing)
- Dividend tracking alongside director salary
- Payroll for directors and any employees
- Companies House filing requirements
- Statutory micro-entity accounts preparation
Xero and Sage are the strongest all-round options for limited companies at the micro entity level. Both connect with accountant portals and produce reports in the format needed for year-end accounts preparation. QuickBooks is also widely used for small limited companies, particularly those that manage their accounts with an accountant who handles the year-end work.
FreeAgent includes a built-in Corporation Tax estimate and links to Companies House, which makes it particularly useful for contractor limited companies with simple structures.
If you are a limited company director using accounting software for the first time, it is worth letting your accountant know before you choose. Most accountants work within one or two platforms and can offer better support if your software matches theirs. Some accountants also have partner discounts available through Xero or QuickBooks that can reduce your subscription cost.
How Does Accounting Software Help With Your Income Tax Bill?
Good accounting software does not just file your returns — it helps you understand your tax position throughout the year rather than discovering a surprise bill in January. Here are the current Income Tax rates your software should be helping you plan around:
| Band | Taxable Income (2026–27) | Tax Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic Rate | £12,571 to £50,270 | 20% |
| Higher Rate | £50,271 to £125,140 | 40% |
| Additional Rate | Over £125,140 | 45% |
Source: GOV.UK — Income Tax rates and Personal Allowances (tax year 6 April 2026 to 5 April 2027)
Most of the software options listed above — particularly Xero, QuickBooks, and FreeAgent — include a live tax estimate that updates as you record income and expenses throughout the year. For a sole trader on the basic rate, seeing that estimate change in real time as you log expenses is one of the most practical benefits of moving to accounting software.
The standard Personal Allowance remains £12,570 for the 2026 to 2027 tax year. Every pound of allowable business expense you record correctly reduces your taxable profit and therefore your Income Tax liability.
FAQs About Best Accounting Softwares for Micro Entities
Do I need accounting software if I use a spreadsheet?
If MTD for Income Tax applies to you — which it does from April 2026 if your gross income is over £50,000 — a standalone spreadsheet is not sufficient on its own. You either need to use accounting software directly or use bridging software that creates a digital link between your spreadsheet and HMRC’s MTD system. Bridging software is cheaper but offers fewer features. If you are close to the threshold, moving to proper accounting software now is likely to be easier in the long run.
Is there truly free HMRC accounting software?
HMRC offers a free tool for sole traders and landlords with straightforward single-source income. It is basic — no bank feeds, no invoicing, no accountant access — but it is fully compliant with MTD for Income Tax and costs nothing. QuickFile and Zoho Books also offer permanently free tiers for smaller businesses. FreeAgent is free through NatWest and RBS business accounts.
Can my accountant access my accounting software?
Yes. All the major platforms — Xero, QuickBooks, FreeAgent, and Sage — allow you to grant your accountant access to your account. They can then view your records, make adjustments, and submit returns on your behalf. This is one of the key advantages of cloud accounting software over desktop software: you and your accountant are always looking at the same figures.
How much should a micro entity expect to spend on accounting software?
Entry-level plans from the main providers start at around £8 to £16 per month, though most providers offer significant introductory discounts. For a sole trader with simple accounts, free options like QuickFile or FreeAgent through NatWest may be sufficient. For a limited company with employees and VAT, a paid plan is generally the more practical choice. Factor in the time saved on admin when weighing up the cost — for most micro entities, a good software package pays for itself quickly.
Final Thoughts
Choosing the right accounting software is one of the most practical decisions you can make as a micro entity or self-employed business owner in the UK right now. With MTD for Income Tax now mandatory for those earning over £50,000 and rolling down to £20,000 by 2028, using HMRC-recognised software is no longer optional for a growing number of businesses — it is a legal requirement.
The right choice depends on your situation. If you want the most complete feature set and are comfortable paying a monthly fee, Xero is the standout option. If you are a sole trader who banks with NatWest or RBS, FreeAgent is free and fully capable. If budget is the priority and you have simple accounts, QuickFile or the HMRC free tool will get you compliant without spending anything.
If you are unsure which software suits your business structure, or if you want help setting it up and connecting it correctly to HMRC, the team at Micro Entity Accounts can advise and support you through the process.
Disclaimer: The content on MicroEntityAccounts is for informational purposes only and do not constitute tax or financial advice. We recommend consulting a certified tax professional or the HM Revenue and Customs Dept (HMRC) for accurate guidance. MicroEntityAccounts is not responsible for any decisions made based on the information provided.
