What is Making Tax Digital? A Plain-English Guide for UK Sole Traders (2026)

Disclosure: Some links in this article are affiliate links. If you sign up through them we may earn a commission, at no extra cost to you. This never affects our recommendations. Read our full disclosure.

Making Tax Digital for Income Tax is now live for UK sole traders and landlords earning above £50,000 a year, as of April 2026. If you earn between £30,000 and £50,000, your deadline is April 2027. And if your income is below £30,000, you are not currently required to participate, though voluntary sign-up is possible.

If you are self-employed in the UK and have not yet sorted out compliant software, this guide tells you exactly what Making Tax Digital means for you, what you need to do, and which software to use.

What is Making Tax Digital?

Making Tax Digital (MTD) is HMRC’s programme to move UK tax reporting from paper and spreadsheets to digital software. The idea is straightforward: instead of filling in a Self Assessment tax return once a year, you keep digital records throughout the year and send quarterly summary updates to HMRC automatically through software.

MTD has two main parts that affect sole traders and freelancers:

• MTD for VAT has been mandatory for VAT-registered businesses since 2019. If you are already VAT registered, you are likely already using compliant software for this.
• MTD for Income Tax Self Assessment (ITSA) is the newer requirement affecting self-employed people and landlords. This is the one that came into force in April 2026 for higher earners.

This guide focuses on MTD for Income Tax, since that is the change affecting the largest number of UK sole traders and freelancers right now.

Who needs to comply with MTD for Income Tax?

The rules are based on your total qualifying income from self-employment and property combined, not your profit. The thresholds work as follows:

Income threshold	MTD ITSA start date
Above £50,000	April 2026 (already live)
£30,000 to £50,000	April 2027
Below £30,000	No date confirmed yet

These thresholds apply to your gross income before expenses. So if you are a freelancer who billed £55,000 in the last tax year but spent £20,000 on business costs, your qualifying income is still £55,000. You need to be compliant now.

Partnerships are not included in the current rollout but HMRC has indicated they will be brought into MTD at a later date.

What does Making Tax Digital actually change?

The biggest change is moving from one annual tax return to four quarterly updates plus a final declaration each year.

Quarterly updates

Instead of doing everything in January, you send HMRC a summary of your income and expenses every three months. These are not full tax returns. They are brief digital submissions that your software handles automatically. The quarterly periods are:

• 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)

Missing a quarterly deadline can result in penalty points under HMRC’s new points-based system. Accumulate enough points and a financial penalty follows.

The final declaration

After the tax year ends, you still submit a final annual declaration to HMRC confirming your total income and claiming any allowances, reliefs or deductions not covered in the quarterly updates. This replaces the Self Assessment tax return. The deadline for this remains 31 January following the tax year end.

Digital record keeping

MTD requires you to keep digital records of your business income and expenses. Spreadsheets are not considered compliant on their own unless they are connected to HMRC via approved bridging software. The simplest approach is to use dedicated accounting software that handles everything automatically.

What does Making Tax Digital not change?

A few things worth knowing to avoid unnecessary panic:

• The amount of tax you pay does not change. MTD changes how and when you report to HMRC. It does not create new taxes or change how your income is calculated.
• You do not need to pay tax quarterly. Quarterly updates are summaries only. Your tax bill is still calculated and paid annually, due 31 January.
• You do not need to hire an accountant. Most MTD-compliant software is designed for non-accountants. You can manage it yourself.
• Your accountant can still help. If you use an accountant, they can handle the quarterly submissions on your behalf using software that gives them access to your records.

Do I need to sign up for MTD for Income Tax?

If your income is above the relevant threshold, HMRC expects you to be compliant from your applicable start date. You do not necessarily need to manually sign up in all cases, as HMRC has been contacting affected taxpayers, but you do need to be using compatible software and keeping digital records.

If you are not sure whether you need to comply, check your last two tax years. If your total self-employment and property income exceeded £50,000 in either year, you need to be set up now. If it exceeded £30,000, you have until April 2027 but sorting it out now gives you time to adjust.

You can also check HMRC’s official guidance at gov.uk, or speak to an accountant if you are unsure of your position.

What software do you need for Making Tax Digital?

You need software that is listed on HMRC’s approved list of MTD-compatible products. Not all accounting tools qualify, so it is important to check before committing to any platform.

The main options used by UK sole traders are:

Xero

Xero is one of the most widely used accounting platforms among UK sole traders and freelancers. It has been MTD for VAT compliant since the early rollout and its MTD for Income Tax capability is fully listed by HMRC. Plans start from £15/month. Most UK accountants are familiar with it, which helps if you work with one. Read our full Xero review in our accounting software comparison.

QuickBooks

QuickBooks is often the easier starting point for sole traders who have not used accounting software before. The Self-Employed plan at £8/month is built around self-employment income and submits directly to HMRC. It is on the MTD approved list. Read our Xero vs QuickBooks comparison if you are choosing between the two.

FreeAgent

FreeAgent is free if you bank with NatWest, RBS, or Mettle. It is MTD compliant and well suited to sole traders and freelancers. If you bank with one of those providers, it is the most cost-effective starting point. Read our FreeAgent section in our full comparison.

Sage

Sage is a long-established UK accounting platform with strong HMRC compliance credentials. It tends to be preferred by more established businesses and those working with traditional accountancy firms. Plans start from £14/month.

All four are on HMRC’s approved list for MTD for Income Tax. For a full comparison of pricing, features, and which suits different types of sole trader, see our best accounting software for UK sole traders guide.

Can I use a spreadsheet for Making Tax Digital?

Not on its own. Spreadsheets are not MTD compliant unless they are connected to HMRC via approved bridging software. Bridging software acts as a connector between your spreadsheet and HMRC’s systems, translating your data into the correct digital format for submission.

Some bridging software options exist, but for most sole traders the total cost of bridging software plus the time involved in maintaining spreadsheets makes dedicated accounting software the more practical and cost-effective choice. Most accounting software options start from £8 to £15 per month and automate the submission process entirely.

What happens if I do not comply with Making Tax Digital?

HMRC has introduced a new points-based penalty system for MTD for Income Tax. Here is how it works:

• Each missed quarterly submission adds one penalty point to your account.
• Once you reach the threshold for your filing frequency (four points for quarterly filers), a £200 financial penalty applies.
• Further missed submissions after the threshold result in additional £200 penalties each time.
• Points reset after a period of full compliance.

Separate late payment penalties also apply if your tax bill is paid late, as under the existing Self Assessment system.

HMRC has said it will take a supportive approach in the first year of MTD for Income Tax going live, focusing on helping businesses get set up rather than issuing penalties immediately. However, this is not guaranteed and it is not worth relying on.

How to get set up for Making Tax Digital: a simple checklist

1. Check if you need to comply now. If your self-employment or property income exceeded £50,000 in either of the last two tax years, you need compliant software now. If it exceeded £30,000, your deadline is April 2027.
2. Choose MTD-compatible software. Select a platform from HMRC’s approved list. Xero, QuickBooks, FreeAgent, and Sage are all solid choices for UK sole traders.
3. Set up digital record keeping. Connect your bank account to your software so transactions feed in automatically. Categorise income and expenses as you go rather than leaving it all to the end of the quarter.
4. Make your first quarterly submission. Your software will prompt you when a quarterly period closes. Review the summary, check it looks right, and submit. The whole process takes a few minutes once your records are up to date.
5. Submit the final declaration. At the end of the tax year, complete your final declaration via the software. This covers any additional income, reliefs, or adjustments not included in the quarterly updates.

Frequently asked questions about Making Tax Digital

Does Making Tax Digital apply to employees?

No. MTD for Income Tax applies to self-employed people and landlords, not to employees who are taxed through PAYE. If you are employed and also have a side income from self-employment above the threshold, the self-employed portion of your income is what matters for MTD purposes.

I already do Self Assessment. How is MTD different?

Under Self Assessment, you file one tax return per year, usually in January. Under MTD for Income Tax, you send four quarterly summary updates throughout the year via software, then a shorter final declaration in January instead of the full return. The amount of information you report is similar, but it is spread across the year rather than done all at once.

Can my accountant handle Making Tax Digital for me?

Yes. If you use an accountant, they can manage the quarterly submissions on your behalf using software that gives them access to your records. You still need to use MTD-compatible software and keep digital records, but your accountant can take care of the actual submissions.

What if my income varies and I am not sure if I meet the threshold?

HMRC looks at your qualifying income over the previous tax year to determine whether you need to comply. If your income fluctuates around the threshold, it is worth checking your last two completed tax years. If you exceeded the threshold in either year, you should be using compliant software. If you are genuinely uncertain, speak to an accountant for advice on your specific situation.

Is Making Tax Digital the same as paying tax quarterly?

No. The quarterly submissions are reporting updates only. They tell HMRC what your income and expenses look like so far. You do not pay tax quarterly. Your actual tax liability is still calculated once a year and paid by 31 January following the end of the tax year.

What if I miss a quarterly MTD deadline?

Missing a deadline adds a penalty point to your account. Reach the threshold of four points and a £200 financial penalty applies, with further £200 penalties for each subsequent missed submission. HMRC has indicated a softer approach in the early months, but the penalty system is now in place.