Tax is a complex area for sole traders who find it difficult to get to grips and the government’s Making Tax Digital (MTD) policy has done nothing to change that. Knowing what you can claim as expenses is the key to staying legal and in making sure you pay the least amount of tax that you can. This guide will dive into a breakdown of what you can and cannot claim as self-employment expenses under MTD.
Key here is knowing how HMRC calculates your qualifying income, which is relevant to working out, when you need to meet MTD for Income Tax Self-Assessment. But, if you know how to calculate it, you can prepare for MTD in advance. It is important to keep good records, and to know the thresholds and timelines that apply to you. If you are unsure if your qualifying income is sufficient, or need help with preparing for MTD, speak to a professional accountant or tax adviser “Lanop Business and Tax Advisors”.
Qualifying income is the gross amount you earn from self-employment and property before expenses or tax deductions. This includes:
Note that only income from relevant sources, income from partnerships, furnished holiday lettings, or income from any other non-relevant sources are excluded.
Your eligibility will be determined by HMRC using the information relevant to you from your Self-Assessment tax return for the last tax year. For instance:
If you have more than the relevant thresholds of qualifying income, HMRC will tell you what your MTD obligations are.
If you start a business after 6 April 2026, you will not have to use MTD for that business until after you have filed your first Self-Assessment tax return which contains income from that business. But nothing stops you from using MTD for Income Tax for new business from when it commences.
HMRC will annualize your qualifying income if your accounting period is less or more than 12 months. So, for example, if you had only been trading for 6 months in your first tax year, HMRC will double your income to work out your qualifying income.
Learning how HMRC are working out your qualifying income might be an effective way to prepare for MTD ready. It is not so much what you know as what you can prove.” Keeping accurate notes and knowing your own case’s limits and deadlines is critical. If you are unsure about the stability of your receipts qualifying for MTD or need to help to get ready for MTD, please book a consultation with the expert accountants or tax advisors from Lanop Business and Tax Advisors
As per HMRC guidelines:
It is important to evaluate your income and plan to make a smooth transition.
As an MTD sole trader, you can claim a number of business expenses which offset your taxable income. But it is crucial these costs are “wholly and exclusively” for the business. For detailed accounting and taxation advice you can contact Lanop Business and Tax Advisors.
What percentage of use of the vehicle is related to your business and what percentage is personal. Each mile the car is driven for business purposes involves a deduction of a portion of the cost of using the vehicle.
Home working is common among sole traders. HMRC lets you reclaim a percentage of what your home costs you:
Failing that, you can use HMRC’s simplified expenses method, which allows you to claim a flat rate depending on how many hours a month you work from home.
If you use a car for business:
Pick the best tax-efficient solution for your own circumstances.
HMRC usually disallows claims for client entertainment. Meals during a business trip can be charged. Keep enough records and receipts
With MTD, it is all about the digital record:
Keep all receipts and records for a minimum of five years.
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Perfect For: Sole traders moving from manual to digital record keeping.
Sole traders need to know all about these allowable expenses, and how to claim them – particularly under MTD. With proper digital record keeping in place and knowing what is possible to claim, you can remain on the right side of the law and maximize how you look in the eyes of the tax man. If you struggle with getting to grips with MTD or controlling your business costs, Lanop Business & Tax Advisors can help guide you. Expert and experienced tax advisors can offer you valuable advice – and save you a significant amount of headaches and money. Our specialists can walk you through and make sure that you are getting the most out of your allowable expenses. Lanop Business and Tax Advisors services can therefore assist you in keeping your business cost-effective and efficient. We are just a call away.
From April 2026 more than £50,000 investment income and trading profits sole traders, and property businesses will have to report quarterly to HMRC under MTD for ITSA. The result of this is that sole traders who have qualifying income will be required to maintain digital records and submit those records through to HMRC for the MTD using MTD-compatible software from the tax year commencing on 6 April 2026 (the 2026/27 tax year). It will apply to all those earning more than £30,000 from April 2027 and £20,000 from April 2028. Preparation is key to compliance and preventive action.
So yes, sole traders, if their income is above the thresholds, must do Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA). From April 2025, sole traders turning over more than £50,000 are obligated to MTD. This includes maintaining digital records and providing quarterly updates to HMRC via MTD-compliant software. You need to be able to review your earnings and plan for these changes so that you remain compliant and avoid penalties.
As a sole trader, there are many business expenses you can deduct from your taxable income. These costs must be “wholly and exclusively” for business. Typical deduction items are:
What is more, if you work from home, you can deduct a percentage of costs of running your household, including council tax, mortgage interest or rent, utility bills and internet/phone bills, by the percentage of use of your home for business.
As Managing Partner at Lanop Business & Tax Advisors, Aurangzaib “Zaib” Chawla is more than an accountant, he is a trusted business advisor to entrepreneurs and SMEs. With expertise in structuring, scaling, and international expansion, Zaib guides business owners through every stage of growth, ensuring they not only remain compliant but also unlock new opportunities to thrive.
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At Lanop, I am providing my services as the Managing Partner and Tax Specialist. My expertise includes helping medium and small-scale businesses in their accountancy and legal requirements, business start-up support, strategic review, payroll system review and implementation, VAT and tax compliance to cloud accounting. I am also an expert in financial reporting, identifying and monitoring risks, strategic business development, client retention, market acquisition and deals closure by carefully planning my sales cycle.
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