Does a new limited company need accounting software?
Short answer: not always by law, but nearly always in practice. Here's what the rules actually require, and when software stops being optional.
The short answer
- Every limited company must keep adequate accounting records under the Companies Act. The law doesn't say they must be kept in software.
- Once you're VAT registered, Making Tax Digital means you need compatible software.
- If you run payroll, you need software that reports to HMRC in real time.
- Making Tax Digital for Income Tax (from April 2026) applies to sole traders and landlords, not to limited companies.
What the rules require, by situation
| Your company | Software required? | Why |
|---|---|---|
| VAT registered | Yes | Making Tax Digital for VAT requires compatible software to keep digital records and file VAT returns. |
| Not VAT registered, a handful of transactions | Not legally | You must still keep adequate records. Software is optional but makes year-end much cheaper and faster. |
| Paying yourself or staff through PAYE | In practice, yes | Payroll must be reported to HMRC in real time, which needs payroll software (often built into your accounting software). |
| Expecting to pass the £90,000 VAT threshold | Plan for it now | Starting on software before registration avoids changing systems in the middle of a VAT quarter. |
What 'adequate records' means for a company
A company must record money in and out day by day, what it owns and owes, and (if it sells goods) its stock. HMRC expects records to be kept for at least six years. See GOV.UK's guidance on company and accounting records.
A spreadsheet can technically meet this for a very simple company. Software reduces errors, which matters when your year-end accounts and Corporation Tax return are built from those records.
VAT and Making Tax Digital
All VAT-registered businesses must follow Making Tax Digital for VAT: keep digital records and submit returns through compatible software. The compulsory registration threshold is £90,000 of VAT-taxable turnover in any rolling 12 months. HMRC's guidance: find MTD-compatible software for VAT.
What it costs to start
Software can be free. FreeAgent comes at no cost with an eligible NatWest, RBS, Ulster Bank or Mettle business account. Otherwise, FreeAgent lists £33 a month and Xero plans range from £18 to £70 a month (prices exclude VAT).
To choose between them, read FreeAgent or Xero for a new limited company.
Setting up a new company?
We'll help you pick software and set it up properly from day one, so your first year-end goes smoothly. See our bookkeeping service.
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Common Questions
Is accounting software a legal requirement for a limited company?
Not in itself. A company must keep adequate accounting records. Software becomes required in practice once you are VAT registered (Making Tax Digital for VAT) or run payroll through PAYE.
Can I use a spreadsheet for my limited company?
For a very simple company that isn't VAT registered, yes, as long as the records are complete. VAT-registered businesses need MTD-compatible software, which can include bridging software that links to a spreadsheet.
Does Making Tax Digital for Income Tax apply to limited companies?
No. MTD for Income Tax applies to self-employed people and landlords with qualifying income above the threshold from April 2026. Limited companies are covered by MTD for VAT if they are VAT registered.
How long must a limited company keep records?
Generally at least six years from the end of the accounting period they relate to, or longer in some circumstances.
Last reviewed October 2026. Software prices are taken from FreeAgent's and Xero's own UK pricing pages, exclude VAT and can change at any time — check the provider's site before you buy. General guidance for UK limited companies, not advice on your specific circumstances.