Making Tax Digital: a checklist for sole traders
This straightforward guide explains everything sole traders need to know to prepare for Making Tax Digital.
Making Tax Digital (MTD) is a government initiative that’s set to transform the way sole traders and landlords manage and report their taxes. From 6 April 2026, MTD for Income Tax will become mandatory for individuals with a business or property income over £50,000.
Under the new rules, you’ll need to keep digital records, use compatible software, and submit quarterly updates to HMRC, replacing the traditional once-a-year tax return with a more streamlined, real-time approach.
MTD is part of the government’s plan to modernise the tax system, reduce costly administrative errors, and support economic growth. By keeping digital records throughout the year, you can save time, reduce stress at tax return time, and get a clearer picture of your business finances.
In this guide, we’ll walk you through what MTD means for you as a sole trader, what’s required to stay compliant, and how to make the most of the time-saving benefits.
Key takeaways
You need to start using Making Tax Digital for income tax from April 2026 if your total income from self-employment is more than £50,000 for the 2024/25 tax year
Under MTD rules, you must submit four quarterly updates plus a year-end declaration each tax year
You must keep digital records and make all submissions through MTD-compatible software
You can sign up for MTD through the government website, or ask your accountant to do this on your behalf
Earn extra interest on your business savings.
What is Making Tax Digital for sole traders?
Making Tax Digital (MTD) is a government initiative aimed at modernising the tax system by requiring sole traders (and those receiving property income) to keep digital records and submit tax information online using approved software.
Currently, if you’re a sole trader, you only need to send one self-assessment tax return each year, which you can do via the HMRC online portal, by mail or through software. If you submit your tax return by paper, you must do this by 31 October, while the deadline for online submissions is 31 January.
However, once the new MTD rules come into force, you can no longer use the online portal or submit your tax return by paper. Instead, you must do everything digitally through software. You also need to submit four quarterly updates, as well as one final declaration by 31 January.
The idea is that this should streamline the tax process for taxpayers and HMRC, as well as improve accuracy. The government believes it should help close the tax gap and recover the substantial tax revenue lost each year to issues such as tax avoidance and evasion.
When does Making Tax Digital for sole traders start?
The Making Tax Digital roll out will be as follows:
If your total income from self-employment (and property letting) is more than £50,000 before deducting expenses or taxes in your 2024-25 tax return, you need to use MTD for income tax from 6 April 2026
If your total income from self-employment (and property letting) is more than £30,000, you need to use MTD for income tax from 6 April 2027
If your total income from self-employment (and property letting) is more than £20,000, you need to use MTD for income tax from 6 April 2028
Note that MTD for VAT has been in place since 2019 and was fully rolled out in 2022. This means that if you’re a business (including sole traders) with a turnover above the VAT threshold of £90,000 a year, you should already have registered for VAT and be complying with MTD requirements.
How to get ready for Making Tax Digital
The steps below can help ensure you’re ready for MTD.
1. Check whether Making Tax Digital applies to you
You may have already received a letter from HMRC informing you of these changes, or it might be on its way. This letter contains a QR code that you can scan to find out whether you’re affected.
Alternatively, you can head to the GOV.UK website and use the government’s online service to check whether MTD applies to you.
This tool currently only asks you about your qualifying income for the 2024-2025 tax year and the 2025-2026 tax year. But, if all the following apply, you must use Making Tax Digital from 6 April 2026:
You’re an individual registered for self-assessment
You had income from self-employment or property, or both, before 6 April 2025
You have a qualifying income of more than £50,000 in the 2024-2025 tax year
2. Understand what is changing
If MTD applies to you, it’s important to have a clear understanding of what your MTD obligations are so you remain compliant.
As well as keeping digital records, you need to submit both quarterly updates and a final declaration to HMRC.
Your quarterly updates must summarise your total income and expenses for that period, but they require less information than your annual tax return. As they are cumulative, you can include any corrections to past information throughout the year.
You then need to submit your final year-end declaration and pay your tax by 31 January. This is where you must share details of all other taxable income, including investments and savings interest. You can also claim relevant tax reliefs here, such as pension contributions.
3. Choose MTD-compatible software
The GOV.UK website lists all MTD-compatible software that’s currently available. When choosing software, you should consider factors such as whether you want to keep using any record-keeping software you already use. If you do, you need to look for bridging software, because this connects your current accounting software to software that works with MTD.
Also, keep in mind that some types of software can submit both quarterly updates and your year-end tax return, while others can only do one, so check first.
4. Start keeping digital records now
Once you’ve chosen your software, it’s worth starting to keep digital records now (if you don’t already). This can make the transition a lot smoother.
You might also want to think about opening a business bank account if you don’t have one.
5. Speak to an accountant
If you have an accountant, it’s worth discussing MTD with them to ensure you fully understand the requirements and have the right accounting software. If you don’t have an accountant, you might feel more comfortable with the process if you hire one. You can also authorise your accountant to submit your quarterly updates and your tax return on your behalf if you prefer.
How do I sign up for MTD?
You can sign up for MTD on the GOV.UK website. You choose to sign up voluntarily to test the service now, but you still need to submit a self-assessment tax return for the 2024-25 tax year. Or you can sign up at a later date.
To do this, you need the user ID and password you received when you signed up for self-assessment. You may also need to provide further proof of ID.
If you have an accountant, you can ask them to sign up on your behalf.
When do I need to submit my quarterly updates?
The due date for each quarterly submission is the 7th day of the following month, as follows:
6 April to 5 July – due by 7 August
6 July to 5 October – due by 7 November
6 October to 5 January – due by 7 February
6 January to 5 April – due by 7 May
How will Making Tax Digital benefit sole traders?
Although the transition to Making Tax Digital may seem a little daunting, there are several benefits to the new process:
Better tax planning: By submitting quarterly updates, you can receive an estimate of how much tax you need to pay based on your reported income, giving you more time to prepare and save for taxes
Improved financial insight: A lot of MTD-compatible software offers built-in reporting features that can significantly improve how you manage your business finances. You can automatically generate real-time cash flow projections, profit and loss statements, tax summaries and balance sheets, giving you a clear, up-to-date view of your financial position at any time
Reduced admin: Using MTD-compatible software should also reduce the amount of time you need to spend on admin, because it can automate processes such as tax calculations, quarterly statements and your financial declaration
Less chance of errors: Using software lowers the risk of making a mistake in your tax calculation and tax return, helping you avoid incurring penalties. What’s more, because you must submit quarterly statements, you have regular opportunities to spot and correct any issues before making your final declaration to HMRC
What challenges might sole traders face?
Despite the benefits, navigating Making Tax Digital is also likely to present challenges. These include:
Cost of software: MTD requires the use of compatible accounting software, which can be an added expense, especially for sole traders used to spreadsheets or paper records. Although some free software is available, you may need to pay a fee to access additional features
More deadlines: As a sole trader, you currently only need to submit a tax return once a year. But under MTD, you need to submit updates to HMRC each quarter, as well as your annual tax return. It’s important to stay on top of these extra deadlines to avoid penalties
Steep learning curve: Moving from manual or spreadsheet-based systems to digital platforms can be daunting, particularly for those with limited tech experience. Transferring existing records into new systems can also be time-consuming and complex
FAQs
What counts as qualifying income for MTD?
For MTD purposes, your qualifying income refers to the total income you get in a tax year from self-employment as a sole trader and/or property.
If your income is more than £50,000 for the 2024-25 tax year, you must use MTD for income tax from April 2026. You might earn all of this from being a sole trader, or you might earn half of it from sole trader income and half from rental income, for example.
Does it mean I have to submit four tax returns a year?
No, you still only submit one full tax return each year, but on top of this, you must send quarterly updates to HMRC. These are summaries of income and expenses, such as sales from goods or services, and costs such as business equipment or subscriptions. MTD-compatible software can automatically compile these records, giving you a total income and expenditure figure for each quarter.
Do I need to keep more records, and is this more expensive?
With Making Tax Digital, you don’t necessarily need to keep more records, but you do need to keep them in a different way – digitally. You need to use MTD-compatible software to maintain these digital records, and while some software is free of charge, some providers will charge a monthly fee, particularly if you want to access extra features that can help you better manage your business finances. If you use an accountant to submit your quarterly updates, you might also need to pay more for their services.
However, some sole traders may already use suitable software, in which case there are no additional charges.
Do I need to make quarterly payments?
No, you only make one tax payment each tax year. But you must still submit quarterly updates.
Do I need a business bank account for MTD?
Sole traders don’t have to open a business bank account, but there are many benefits to doing so. Having a business bank account makes it much easier to separate your business and personal finances, reducing the risk of error, plus some automatically include accounting software to save you time.
What happens if I miss a quarterly update deadline?
During the testing phase, when some taxpayers have voluntarily submitted quarterly updates to test the system, HMRC has waived fines for late submissions.
However, once MTD for income tax is fully rolled out, each time you miss a quarterly update deadline, you receive one penalty point. Once you’ve accrued four penalty points, you receive a £200 fine.
What happens if I don’t pay my tax on time?
You could also pay a penalty if you fail to pay your tax bill on time. If you haven’t paid your tax after 15 days, you pay 3% of the amount outstanding. If you still haven’t paid after day 30, you pay 3% on what was outstanding at day 15, plus 3% on the outstanding amount at day 30.
If you still have tax to pay after day 31, you must pay another penalty that accrues daily at 10% per year on the outstanding amount.
It’s important to contact HMRC as soon as possible if you’re struggling to pay your tax bill.
About Rachel Wait
Rachel has spent the majority of her career writing about personal finance for leading price comparison sites and the national press, including for the Mail on Sunday, The Observer, The Spectator, the Evening Standard, Forbes UK and The Sun.