Preparing for Making Tax Digital as a Sole Trader
Making Tax Digital for Income Tax (MTD ITSA) represents one of the biggest changes to the tax system for sole traders in a generation. From April 2026, many sole traders will move away from the familiar annual Self Assessment process and into a system of ongoing digital reporting. While that date may still feel distant, early preparation is important.
MTD is not just about filing tax more often. It requires changes to how records are kept, how income and expenses are tracked, and what software is used. Sole traders who leave preparation too late may find themselves rushing to adopt new systems under pressure, increasing the risk of errors, missed deadlines, or unnecessary costs. Preparing early allows time to choose the right tools, improve record keeping habits, and spread the learning curve gradually.
Even if MTD does not apply to you from April 2026, understanding the changes now helps future proof your business. MTD is being introduced in phases, and most sole traders will fall within scope over time. Getting comfortable with digital records and software sooner rather than later can make the eventual transition far smoother.
What Making Tax Digital for Income Tax Means for Sole Traders
Making Tax Digital for Income Tax changes how sole traders report their business income and expenses to HMRC. Instead of submitting one Self Assessment tax return each year, you will be required to keep digital records and send updates to HMRC throughout the year using compatible software.
Under MTD ITSA, sole traders must record income and expenses digitally at transaction level. These records are then used to submit quarterly updates to HMRC, giving a running picture of business performance. At the end of the tax year, a final digital declaration is submitted to confirm the figures, make any necessary adjustments, and finalise the tax position.
Importantly, MTD does not change how much tax you pay or the rules around allowable expenses. It changes how and when information is reported, not the underlying tax calculation. For sole traders, this means moving away from once-a-year reporting towards a more regular, digital approach that relies on accurate, up-to-date records throughout the year.
When MTD Will Apply to You
Making Tax Digital for Income Tax will be introduced in stages, based on your qualifying income rather than your profits. HMRC will use figures from your past Self Assessment tax returns to decide when you must join MTD.
From April 2026, MTD will apply if your combined qualifying income from self employment and property is more than £50,000 per year. From April 2027, the threshold reduces to more than £30,000, and from April 2028, it is expected to reduce again to more than £20,000.
HMRC will typically look at the income figures reported on your most recent submitted tax return before the start of the tax year in question. If that return shows qualifying income above the relevant threshold, you will be required to follow MTD rules for the entire tax year. This means keeping digital records and submitting quarterly updates even if your income later falls below the threshold.
If your income is close to a threshold, early planning is particularly important. A small increase in turnover could bring you into scope, and HMRC will not assess eligibility in real time. Your obligation is set in advance based on historic data.
What Counts as Qualifying Income
Qualifying income for MTD includes gross income, not profit. For sole traders, this means total business turnover before expenses. For landlords, it includes gross rental income received during the tax year.
If you have both sole trade income and property income, HMRC adds these together to determine whether you exceed the MTD threshold. For example, a sole trader with £35,000 of business turnover and £20,000 of rental income would have £55,000 of qualifying income and fall within MTD from April 2026.
Income that does not count as qualifying income includes employment income taxed through PAYE, dividends, savings interest, pensions, and capital gains. These remain outside the scope of MTD for Income Tax, even though they are still reported as part of your overall tax position.
Understanding what counts and how HMRC measures it is critical. Many sole traders assume eligibility is based on profit or just business income alone, but it is the combined gross income from self employment and property that determines when MTD applies.
How Tax Reporting Will Change Under MTD
Making Tax Digital for Income Tax replaces the traditional once-a-year Self Assessment process for business income with ongoing digital reporting. Instead of pulling together figures long after the tax year has ended, sole traders will be expected to keep their records up to date and submit information to HMRC at regular points throughout the year.
The annual Self Assessment tax return will no longer be used to report sole trade or property income once you are within MTD. Instead, HMRC will receive quarterly updates during the tax year, followed by a final digital submission after the year end. Other types of income, such as employment income or dividends, will continue to be reported separately where required.
This shift is designed to encourage more accurate record keeping and reduce end of year pressure, but it does require a different mindset. Tax compliance becomes a year-round process rather than a single annual task.
Digital Record Keeping Requirements
Under MTD, sole traders must keep their business records in a digital format using compatible software. Each individual transaction must be recorded, rather than summary totals. This includes the date, amount, and category of income or expense.
You do not need to store copies of invoices or receipts digitally, but the transaction details must exist in a digital record before any quarterly update is submitted. HMRC expects records to be kept as close to real time as possible, although they can still be entered periodically, provided they are complete and accurate.
Digital records must be kept for each business you operate. If you run more than one sole trade, each business needs its own set of digital records and its own reporting under MTD.
Quarterly Updates Explained
Quarterly updates are summaries of your income and expenses for each three month period of the tax year. These updates are submitted to HMRC using MTD compatible software and are based on the digital records you have kept.
There are four standard quarterly periods, and each update has a filing deadline one month after the period ends. HMRC uses these updates to build an ongoing picture of your business activity, but they do not create a final tax bill. The figures submitted are not confirmations of tax due and can be adjusted later.
Quarterly updates do not include claims for reliefs or allowances that are usually applied at the end of the year. They are purely a reporting mechanism, not a final calculation.
The End of Year Digital Tax Return
After the end of the tax year, you will submit a final digital declaration using MTD software. This replaces the Self Assessment return for your business income. It confirms that all quarterly updates are complete and correct and allows you to make any necessary adjustments.
This is the stage where you apply accounting adjustments, claim allowances and reliefs, and finalise your taxable profit. Once the final declaration is submitted, HMRC can calculate the tax due for the year in the usual way.
Although the process changes, the underlying tax rules remain the same. The final declaration serves the same purpose as the current Self Assessment return, but it is built on digital records and quarterly reporting rather than a single annual submission.
Do You Still Need Self Assessment?
Making Tax Digital for Income Tax removes the need to submit a traditional Self Assessment return for your sole trade once you are within MTD. That part of the return is replaced by quarterly updates and a final end of year digital declaration.
However, Self Assessment does not disappear entirely for everyone. You may still need to file a Self Assessment return if you have other income that is not yet fully covered by MTD, such as complex investment income, capital gains, or certain relief claims. HMRC guidance makes clear that MTD changes how business income is reported, not the wider obligation to declare taxable income where required.
Over time, HMRC intends for more income types to be brought into digital reporting, but for now many taxpayers will operate a hybrid position where MTD reporting sits alongside limited Self Assessment obligations.
MTD Compliant Software
To comply with MTD, you must use software that is compatible with HMRC’s systems. This software must be able to keep digital records, prepare quarterly updates, submit information directly to HMRC, and receive confirmation that submissions have been accepted.
HMRC does not provide free software for most businesses. Instead, you must choose a commercial accounting platform or work with an agent who uses compliant software on your behalf. GOV.UK maintains an official list of MTD compatible software to help businesses choose a suitable product.
For sole traders, the right software is usually one that matches the size and complexity of the business. Simple tools may be sufficient for straightforward income and expenses, while growing businesses often benefit from software that also handles VAT, invoicing, and cash flow.
Using Spreadsheets Under MTD
Spreadsheets are still allowed under MTD, but with important limitations. A spreadsheet on its own cannot submit quarterly updates or final declarations to HMRC. To comply, it must be used alongside bridging software that connects the spreadsheet to HMRC’s systems.
The spreadsheet must contain the underlying digital records, and the transfer of data to bridging software must be done digitally. Manually copying figures into another system does not meet HMRC’s requirements.
In practice, spreadsheets can work for very simple businesses, but they increase the risk of errors and missed deadlines. Many sole traders move to full accounting software to reduce admin and ensure ongoing compliance as MTD becomes mandatory.
Digital Links and Why They Matter
Digital links are the connections between different pieces of software used to keep records and submit information. HMRC requires data to flow digitally from the original record to the submission, without manual retyping or copy and paste.
Examples of acceptable digital links include linked spreadsheet cells, file imports such as CSV uploads, automated data transfers, or API connections between systems. Common pitfalls include exporting totals and re entering them manually or adjusting figures outside the software without recording a digital audit trail.
For sole traders, digital links matter because HMRC can reject submissions that do not meet these rules. Setting up compliant systems early helps avoid disruption, penalties, and last minute fixes once MTD applies.
Can You Be Exempt From MTD?
HMRC recognises that not everyone is able to comply with Making Tax Digital. You may be exempt if it is not practicable for you to use digital tools because of age, disability, or lack of reliable internet access. These are known as digital exclusion exemptions and must be agreed by HMRC; they are not automatic.
There are also income-based exclusions. If your qualifying income is below the relevant MTD threshold, you are not required to join. In addition, some individuals are automatically excluded, such as those who do not have a National Insurance number and cannot reasonably obtain one.
If you believe you qualify for an exemption, you must apply to HMRC directly. Until HMRC confirms the exemption, normal reporting obligations continue to apply.
What Happens If Your Income Drops Below the Threshold
MTD does not switch on and off year by year. HMRC applies a three-year rule to determine whether you remain within scope.
If your qualifying income falls below the threshold for three consecutive tax years, you may be able to leave MTD from the following tax year. Until that point, you are expected to continue keeping digital records and submitting quarterly updates.
This approach is designed to provide stability and avoid frequent changes to reporting obligations due to short-term fluctuations in income.
Practical Steps to Get Ready for MTD
Even if MTD does not apply to you yet, early preparation makes the transition significantly easier. Small changes made early reduce pressure once MTD becomes mandatory. Key actions to take now include:
Review Your Records
Check how income and expenses are currently recorded and whether they are complete and consistent.
Separate Business Finances
Use a dedicated business bank account to simplify digital record keeping and reduce errors.
Choose Suitable Software
Explore MTD-compatible software that matches your business size and confidence with technology.
Improve Digital Habits
Get comfortable recording transactions regularly rather than leaving everything until year end.
How Professional Support Can Help
Accountants and bookkeepers can play a key role under MTD, particularly during the transition period. Support may include setting up compliant software, reviewing digital records, handling quarterly submissions, and ensuring the final declaration is accurate.
For many sole traders, professional support is less about handing everything over and more about creating a system that works day to day, with reassurance that obligations are being met correctly.