The UK government’s Making Tax Digital (MTD) initiative is changing the way sole traders manage and report their taxes. The first phase of the (MTD) Making Tax Digital for business VAT has already been implemented. HMRC is rolling out new requirements that will impact landlords and sole traders across the country to make digital record-keeping.
The UK government aims to include more than 4.2 million taxpayers whose annual income threshold is above £50,000 in Making Tax Digital (MTD) for self-employed. Sole traders and landlords who register under MTD will have their self-assessment tax return filed automatically to HMRC through a cloud-based accounting software.
What is Making Tax Digital (MTD)?
Making Tax Digital (MTD) is HMRC’s initiative to modernize the UK tax system, making it more efficient, effective, and easier for taxpayers. This initiative makes it mandatory for businesses, sole traders and landlords to use cloud-based, MTD-compatible software for filing your tax return.
For sole traders, MTD will fundamentally change the way income tax is reported. Instead of submitting a self-assessment tax return once a year, eligible sole traders will need to keep digital records submitted to HMRC every quarter. This means you have to provide your income updates 4 times a year. The UK government’s goal is to replace manual tax returns with digital tax reporting, reducing tax evasion and improving accuracy.
Here’s what you need to know about the latest HMRC regulations about Making Tax Digital (MTD) for sole traders.
Who Does MTD Making Tax Digital for Sole traders Apply to?
HMRC have recently updated their guidelines regarding whom the new MTD rules apply to, in the tax years 2024/2025 and 2025/26. If you meet the criteria, you will be notified by HMRC to comply with MTD.
Self-employed meeting the following criteria in the year 2024/2025 are mandatory comply with MTD rules from April 2026.
- Individuals registered under self-assessment
- Earning an income more than £50,000
- Income from both self-employment and property
Sole traders and landlords with an annual income of more than £30,000 in the year 2025/2026 must comply with the MTD rules from April 2027.
MTD Registration Timeline for Self-Employed Individuals |
6 April 2026 |
6 April 2027 Self Employed with Income more than £30,000 must register for MTD |
6 April 2028 Self Employed with Income more than £20,000 must register for MTD |
If your business falls under these thresholds, it is crucial to start preparing for digital record-keeping now to avoid last-minute challenges.
- April 2026: If your gross income from self-employment and/or property exceeds £50,000, you’re in.
- April 2027: Threshold drops to £30,000.
- April 2028 (Expected): HMRC is planning to extend it to those earning over £20,000.
Remember: It’s based on turnover, not profit.
That means even if your profit is small, if your turnover crosses the threshold, you’re included.
How Can Sole Traders Prepare for MTD?
Being prepared for ITSA with MTD rules is crucial for several sole traders. In the coming years HMRC will provide further updates on the rules of Making Tax Digital. Therefore, it is suitable to prepare MTD transition now. Planning now will help you comply with HMRC regulations while ensuring higher accuracy with tax filing.
Here’s how you can prepare as a sole trader:
Adopt Accounting Software
Going MTD compliant means you must have HMRC recognized software firsthand. There is several Making Tax Digital software for sole traders to choose from. Software like Xero, QuickBooks, or Sage Accounting are best for updating your income for HMRC. The reason is that you need to sign up for MTD through HMRC-approved cloud-based software, not through the official website.
Keep Digital Receipts & Invoices
MTD has already been implemented on VAT and will be mandatory for self-employed too, as per the HMRC guidelines. The best way to prepare for digital tax for sole traders is to get rid of recording accounts on paper. Start recording your business’s financial records digitally. Keep all the invoices and receipts in a digital format. This makes it easier to migrate your business‘s financial data to the cloud-based accounting software.
Understand Quarterly Deadlines
The MTD makes it crucial for self-employed people to submit their income updates on a quarterly basis to HMRC. Even in MTD for VAT you will need to file your VAT return quarterly. Failing to do so will result in HMRC penalties.
It is one of the best practices to understand your quarterly Making Tax Digital deadlines and plan ahead to stay compliant with MTD.
|
Quarterly Income Updates to HMRC |
Deadlines |
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6 April to 5 July |
5 August |
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6 July to 5 October |
5 November |
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6 October to 5 January |
5 February |
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6 January to 5 April |
5 May |
Work with a Tax Expert
Hire a tax expert to smoothen the entire MTD transition process for you. From ensuring eligibility with MTD to signing you up with the cloud-based software, a tax expert will ensure that your data is accurate and submitted quarterly to HMRC.
Lanop Business & Tax Advisors help sole traders transition to MTD seamlessly, ensuring compliance with minimal disruption to their business.
What Changes Do Sole Traders Need to Make?
Under MTD for Income Tax Self-Assessment (MTD for ITSA), sole traders will need to make the following changes to their self-assessment practices.
Registering MTD for ITSA
Understand your eligibility for MTD to ensure you meet the threshold provided by HMRC before you sign up for making tax digital. For this you need to prepare the essential information to register with MTD, which includes the following:
Personal Details
- Your full name and birth date.
- Your National Insurance number.
Business Information (if it applies)
- The name and address of your business.
- Your business details (trade description).
- The date your business started or when you first earned property income.
Accounting Setup
- Used accounting method (like cash basis or traditional accounting).
- The tax year when you want to begin using MTD for ITSA.
Keep Digital Records
Sole traders must maintain digital financial records using HMRC-compatible software such as Xero, QuickBooks, or FreeAgent.
Submit Quarterly Updates
Instead of one annual tax return, you’ll need to submit updates every three months showing business income and expenses.
End of Year Submission
A final declaration will still be required, summarizing the total income and any reliefs or deductions to HMRC.
Benefits of MTD for Sole Traders
Less Paperwork
No need for paperwork, record-keeping or tax filing for your self-assessment. With the best Making Tax Digital software for sole traders, your data will be automatically on software. All your tax liabilities will be transparent to you without any need for calculation.
Fewer Errors
Using HMRC-recognized digital software reduces calculation mistakes. Your tax filing will be a plain sail for you without being worried of errors, mistakes and deadlines.
Real-time Tax Estimates
After you provide your quarterly updates to HMRC. It will show you your tax position. All your liabilities will be visible. Helping you plan more effectively for annual submission.
Does Every Self-Employed Have to go Digital with MTD?
If you do not meet the HMRC criteria, which is an income less than £50,000, you do not need to comply with MTD for ITSA till 6 April 2026. Similarly, if you earn an income below £30,000 in the tax year 2025/2026, you will not have to register with MTD as of April 6, 2027. HMRC will update this compliance threshold to £20,000 in the coming years for ITSA.
Similarly, foster carers often use a special tax scheme called the Qualifying Care Relief scheme. If they don’t fall in the threshold for self-assessment due to being eligible for this scheme, they are not required to register for MTD.
Individuals who have not received a National Insurance Number (NI) are also exempted from complying with MTD for ITSA.
What Happens If You Don’t Comply?
Complying with MTD is mandatory for all individuals who qualify under the given requirements. Failure to comply with MTD rules could result in
- Penalties and fines from HMRC
- Increased risk of audits
- Errors in tax calculations
- Delays in tax filing and potential interest charges
Sole traders should act quickly to avoid last-minute stress and ensure smooth compliance with the new system.
FAQs
What is making tax digital for sole traders?
Making Tax Digital (MTD) is a new rule from HMRC. It says that if you’re self-employed or a landlord and you earn more than £50,000, you must use HMRC-recognized software to send your tax return online. This makes it easier to keep track of your money quarterly and pay the right tax.
When does making tax digital start for sole traders?
For sole traders, the period when MTD will start depends on the income they earn. For a self-employed earning an income above £50,000 annually will have to register or MTD from 6 April 2026. Similarly, if your income is above £30,000 in the year 2025/2026 you will have to register on 6 April 2027.
Who is likely to be affected by MTD for ITSA?
Landlords and sole traders earning an income more than £30,000 will be affected by MTD for ITSA.
How do I set up making tax digital as a sole trader?
If you’re a sole trader earning over £50,000, here’s how to get started with MTD:
- Check if MTD applies to you
- Get MTD-compatible software
- Sign up for MTD with HMRC
- Give income updates quarterly
- File year end submission
Final Thoughts: Get Ready for MTD Now
Making Tax Digital for sole traders is a necessary step taken by the UK government to revolutionize the tax filing process and avoid tax evasion to HMRC. Preparing for MTD in advance will help self-employed benefit from a smooth MTD transition and ensure compliance. While complying with MTD, you can be ahead of your tax position and ensure accuracy with quarterly updates to HMRC.
Want to register for MTD now? Lanop Business and Tax Advisors is here to make all your software setup to MTD compliance process easy and stress-free for you.
