What is Making Tax Digital? A Plain-English Guide for UK Sole Traders
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Making Tax Digital is the biggest change to UK tax reporting in a generation. If you are self-employed or a sole trader, it changes how you report your income to HMRC, when you report it, and what software you need to do it.
This guide explains what Making Tax Digital actually means for UK sole traders and freelancers, whether it applies to you right now, and exactly what you need to do about it.
What is Making Tax Digital?
Making Tax Digital (MTD) is the government’s programme to move the UK tax system fully online. The idea is to replace paper records and annual tax returns with digital record keeping and more frequent digital updates sent directly to HMRC.
The programme has been rolling out in stages since 2019. MTD for VAT launched first and is already mandatory for all VAT-registered businesses. MTD for Income Tax Self Assessment (ITSA) is the next phase, and it directly affects sole traders and landlords.
What is MTD for Income Tax?
MTD for Income Tax replaces the current Self Assessment system for sole traders and landlords. Instead of filing one annual tax return, you will need to:
- Keep digital records of your income and expenses throughout the year
- Submit quarterly updates to HMRC summarising your business income and expenses
- Submit a final declaration at the end of the tax year to confirm your total income
The quarterly updates are not full tax returns. They are summaries of your income and expenses for that quarter. The final declaration is where you confirm everything and settle your tax liability.
Does Making Tax Digital apply to me?
Whether MTD for Income Tax applies to you depends on your total gross income from self-employment and property combined. The rollout is happening in stages based on income thresholds:
| Income threshold | MTD start date | Status |
|---|---|---|
| Above £50,000 | April 2026 | Mandatory now |
| £30,000 to £50,000 | April 2027 | Prepare now |
| £20,000 to £30,000 | April 2028 | Coming soon |
| Below £20,000 | To be confirmed | Watch this space |
The income threshold refers to your gross income, not your profit. If you earn £55,000 in sales but your profit after expenses is £30,000, MTD still applies to you from April 2026.
If you have multiple income sources, the threshold applies to the combined total. For example, if you earn £35,000 from self-employment and £20,000 from renting a property, your combined income is £55,000, which means MTD applies from April 2026.
What if I am below the threshold?
If your income is currently below £30,000, MTD for Income Tax is not yet mandatory for you. However, the government has confirmed that the threshold will eventually be lowered to bring in lower earners too. The exact date for incomes below £20,000 has not been confirmed yet.
Even if MTD does not apply to you right now, it makes sense to start using MTD-compatible software sooner rather than later. Getting into good digital record keeping habits now means the transition will be far easier when your income grows or the threshold changes.
What do I need to do for Making Tax Digital?
If MTD applies to you, here is what you need to do:
1. Choose MTD-compatible software
You must use software that is on HMRC’s approved list for MTD for Income Tax. Spreadsheets alone are not compliant unless they are connected to bridging software that meets HMRC’s standards.
HMRC maintains an official list of compatible software on their website. All of the main accounting platforms including Xero, QuickBooks, FreeAgent, and Sage are on the list. See our guide to the best accounting software for UK sole traders for a full comparison.
2. Keep digital records
You must keep digital records of all business income and expenses. This means recording transactions in your software rather than in a paper ledger or unconnected spreadsheet. Your software should link directly to your bank account to make this as straightforward as possible.
Records you need to keep digitally include:
- Business income received
- Business expenses paid
- The category of each transaction
- VAT details if you are VAT registered
3. Submit quarterly updates
You will need to submit four quarterly updates per tax year to HMRC. The quarters run from:
- 6 April to 5 July (due by 5 August)
- 6 July to 5 October (due by 5 November)
- 6 October to 5 January (due by 5 February)
- 6 January to 5 April (due by 5 May)
Your accounting software handles the submission directly to HMRC. You review the summary of income and expenses for that quarter, confirm it is correct, and submit. The process should take minutes once your records are up to date.
4. Submit your final declaration
At the end of the tax year you submit a final declaration, which replaces the current Self Assessment tax return. This is where you confirm your total income, claim any additional allowances or reliefs, and calculate your final tax liability. The deadline is 31 January, the same as the current Self Assessment deadline.
What happens if I do not comply with MTD?
HMRC has introduced a points-based penalty system for late MTD submissions. You accumulate a point for each missed deadline. Once you reach a threshold number of points, a financial penalty applies.
For quarterly obligations, the penalty threshold is four points, at which point a £200 fine is issued. Further missed submissions after that trigger additional £200 fines each time. Points reset after you have submitted on time for a set period.
The key message is that missing one deadline will not immediately result in a fine, but habitual non-compliance will add up quickly.
Can I still use an accountant with MTD?
Yes. MTD does not remove accountants from the picture. Many sole traders use an accountant to review their quarterly submissions, handle the final declaration, and advise on tax planning. The difference is that the record keeping and submission process is digital rather than paper-based.
If you use an accountant, make sure they are set up for MTD and familiar with whichever software you are using. Most accountants already work with Xero, QuickBooks, or FreeAgent and can access your records directly through those platforms.
Does MTD affect my VAT returns?
MTD for VAT is separate from MTD for Income Tax and has been mandatory for all VAT-registered businesses since April 2022. If you are already VAT registered, you are likely already using MTD-compatible software for your VAT returns.
The good news is that if you are already using software for MTD VAT, you will almost certainly be using software that is also compatible with MTD for Income Tax. The quarterly update process for income tax works through the same platforms.
What about the Self Assessment tax return?
Once MTD for Income Tax applies to you, the traditional Self Assessment tax return is replaced by the final declaration. You will no longer fill in a SA100 form. Instead, the process happens entirely through your accounting software or your accountant’s portal.
If you currently file your own Self Assessment, this change is significant. You will need to be comfortable using accounting software throughout the year rather than collecting everything together once a year in January.
Which software should I use for Making Tax Digital?
The most important requirement is that the software is on HMRC’s official approved list for MTD for Income Tax Self Assessment. Beyond that, the right choice depends on your situation.
The main options for UK sole traders are:
- Xero (from £15/month) — popular with accountants, excellent for growing businesses
- QuickBooks (from £10/month) — easiest for beginners, strong mobile app
- FreeAgent (from £19/month, free with NatWest/RBS banking) — good UK-focused option
- Sage (from £14/month) — compliance-focused, trusted by traditional accountants
For a full comparison of these platforms including pricing, bank connections, and ease of use, see our complete guide to MTD-ready accounting software for UK sole traders.
Frequently asked questions
When does Making Tax Digital start for sole traders?
MTD for Income Tax started in April 2026 for sole traders and landlords earning above £50,000 per year. The threshold drops to £30,000 in April 2027 and £20,000 in April 2028. If you earn below £20,000, no start date has been confirmed yet.
Do I need to use software for Making Tax Digital?
Yes. MTD requires you to use HMRC-approved digital software for record keeping and submissions. Spreadsheets are not compliant on their own. You need accounting software that can connect directly to HMRC’s systems.
Is Making Tax Digital compulsory?
Yes, once your income exceeds the relevant threshold. There is no opt-out. If your gross income from self-employment or property is above £50,000, you are legally required to comply from April 2026.
What is the difference between MTD for VAT and MTD for Income Tax?
MTD for VAT covers your VAT returns and applies to all VAT-registered businesses. It has been mandatory since April 2022. MTD for Income Tax covers your annual income from self-employment or property and replaces the Self Assessment process. The two schemes run separately, though the same accounting software typically handles both.
Can I use a spreadsheet for Making Tax Digital?
Not on its own. A spreadsheet must be connected to HMRC-approved bridging software that meets the digital links requirement. In practice, using dedicated accounting software is far simpler and more reliable than trying to make spreadsheets MTD-compliant.
What happens to Self Assessment under MTD?
Self Assessment is replaced by the MTD process for those who fall within the income thresholds. Instead of filing one annual SA return, you submit four quarterly updates and a final declaration. The January 31st deadline still applies to the final declaration.
How much do I need to earn to be affected by MTD?
Currently, MTD for Income Tax applies if your total gross income from self-employment and property exceeds £50,000 per year. This threshold falls to £30,000 in April 2027. The income figure is your gross turnover before expenses, not your profit.
