Making Tax Digital: The Complete Guide for UK Sole Traders (2026)

What Is Making Tax Digital?

Making Tax Digital (MTD) is HMRC's programme to move the UK tax system to fully digital record-keeping and filing. The goal is to reduce errors caused by manual tax returns and give both businesses and HMRC a more real-time picture of tax positions throughout the year.

MTD is not optional. Once you're in scope, digital records and compatible software submissions replace the old paper-based or manual process.

There are two phases that affect sole traders and landlords:

1. MTD for VAT — already mandatory for all VAT-registered businesses
2. MTD for Income Tax Self Assessment (MTD ITSA) — mandatory from 6 April 2026 for sole traders and landlords with qualifying income above £50,000, and phased in for smaller businesses in 2027 and 2028

This guide covers both, with a focus on what you need to do now if you're a sole trader in scope or approaching the thresholds. If you are a landlord specifically, our dedicated guide to MTD for landlords covers the property-income rules in more detail, including jointly-owned property and furnished holiday lets.

MTD for VAT: Already Mandatory

MTD for VAT has applied to all VAT-registered businesses since April 2022 (extended from the initial April 2019 rollout for businesses above the threshold).

What it requires:

• Keeping digital VAT records (not paper records that are later entered into software — the records themselves must be created digitally)
• Submitting VAT returns through MTD-compatible software — you can no longer file directly through HMRC's VAT Online portal
• A "digital link" between your accounting records and your VAT return — meaning the figures flow digitally, not via manual re-entry or copy-and-paste

Compatible software: Xero, QuickBooks, FreeAgent, Sage, and several others are all HMRC-approved for MTD VAT. If you're using any of these and have enabled MTD in your HMRC settings, you're likely already compliant.

If you're not yet compliant: HMRC has been issuing penalties for MTD VAT non-compliance since January 2023. If you're filing VAT returns through the old portal rather than compatible software, you need to act now.

MTD for Income Tax (MTD ITSA): The 2026 Change

This is the phase that affects sole traders who don't pay VAT but earn above the income thresholds.

Who is in scope, and when?

These thresholds apply to sole traders and landlords. If you have both self-employment and rental income, they are added together when working out whether you are over the threshold. For the 2026 start, HMRC looks at the income shown on your 2024/25 Self Assessment return.

Not in scope (currently):

• Partnerships and trusts — HMRC has confirmed these will not be brought into MTD ITSA yet, no date set
• Sole traders and landlords with income below the threshold for their start date

What does "qualifying income" mean?

For MTD ITSA, qualifying income means your turnover — gross income before expenses — from self-employment and/or property rental. It is not your profit.

So if your business invoices £55,000 in a year and your expenses bring profit down to £30,000, your qualifying income is £55,000 and you are in scope for the April 2026 start.

What MTD ITSA Actually Requires

If you're in scope, here's what changes:

1. Digital records from the start of each tax quarter

You must keep your income and expense records digitally from day one of the tax period — not reconstruct them later from paper receipts. MTD-compatible software (Xero, QuickBooks, FreeAgent) handles this automatically if you're using it consistently.

"Digital" means the record is created in digital form. A paper receipt photographed and stored doesn't fully satisfy the requirement on its own — the transaction itself must be entered into compatible software.

2. Quarterly updates to HMRC

Instead of one annual Self Assessment, you submit four quarterly updates summarising your income and expenses:

For the 2026/27 tax year, the first quarterly update was due on 7 August 2026 (covering 6 April to 5 July 2026). The next is due on 7 November 2026, covering 6 July to 5 October 2026. See our Q2 action plan for a step-by-step checklist.

Quarterly updates are not full tax returns. They are summaries of income and expenditure for the period — essentially a simplified view of what's in your software. HMRC does not calculate your tax bill from them; that happens at the final declaration after the end of the tax year.

3. Final declaration

After the fourth quarter, you submit a single final declaration, which confirms your total income and expenses for the year, adds any other income and reliefs, and completes your tax position. It replaces the traditional Self Assessment return. The separate "End of Period Statement" that appeared in earlier versions of the plans has been removed.

The deadline for the final declaration is 31 January after the end of the tax year — for 2026/27, that is 31 January 2028.

What Software Do You Need?

You need HMRC-recognised MTD-compatible software. The main options for UK sole traders:

Software prices and plans change often, so check each provider's current pricing before you choose. HMRC maintains a full list of recognised software at gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-income-tax.

Spreadsheets alone are not MTD-compatible. However, bridging software (tools that connect a spreadsheet to HMRC's API) is technically compliant for MTD VAT. For MTD ITSA, dedicated accounting software is the practical approach.

The Penalty-Point Grace Period (2026/27)

HMRC has confirmed that no penalty points will be issued for late quarterly updates in the first year of MTD for Income Tax (2026/27). This means:

• You will not collect penalty points for a missed or late quarterly update during 2026/27
• The intent is to give businesses time to adapt to the new system
• You are still required to comply — the grace period covers penalty points, not the obligation itself, and every quarterly update must still be submitted before you file your final declaration

The grace period does not cover late payment of tax or late filing of your final declaration. Those penalties apply as normal. It also does not mean you can ignore MTD ITSA until 2027: from 2027/28, each missed quarterly deadline earns a penalty point, and reaching four points triggers a £200 fine.

What You Need to Do If You're in Scope

Step 1: Confirm you're in scope Check the turnover on your 2024/25 return. If your combined self-employment and property income is above £50,000, you are mandated from 6 April 2026.

Step 2: Sign up for MTD ITSA Sign up through your HMRC online account or Government Gateway. You'll need:

• Your National Insurance number
• Your UTR (Unique Taxpayer Reference)
• Your accounting period start date

Step 3: Authorise your software In Xero or QuickBooks, go to the MTD settings and authorise the connection to HMRC. This is usually a one-time process.

Step 4: Ensure your records are digital from 6 April 2026 If you started the tax year on paper or in a spreadsheet, now is the time to migrate. Any transactions from 6 April 2026 onwards should be in your MTD-compatible software.

Step 5: Submit every quarterly update on time The first update (6 April – 5 July 2026) was due on 7 August 2026, and the next (6 July – 5 October 2026) is due on 7 November 2026. If you missed the first one, submit it now — it is a summary of what's already in your records, and it must be filed before your final declaration.

What If Your Bookkeeper or Accountant Handles MTD?

If you work with a bookkeeper who handles your records and VAT, they can also handle your quarterly MTD ITSA updates on your behalf — provided they're authorised to act for you and they're using MTD-compatible software.

Important distinction: A bookkeeper who submits MTD returns via Xero or QuickBooks on your behalf is acting as your agent through software authorisation — not as a registered HMRC tax agent. If you need someone to communicate directly with HMRC on your behalf (correspondence, enquiries), you need a registered agent (an accountant or tax professional registered with HMRC's Agent Services Account).

This is a meaningful distinction that many sole traders aren't aware of. Your bookkeeper can file your returns. Only a registered agent can write to HMRC or handle correspondence on your behalf.

Common Questions

Does MTD replace Self Assessment? For those in scope, yes — the quarterly updates plus the final declaration replace the annual Self Assessment return. But the 31 January deadline and the way your tax is calculated remain similar to the current process.

Do I need an accountant for MTD? No. MTD-compatible software is designed for business owners to use directly. However, many sole traders find value in having a bookkeeper maintain their records and a qualified accountant review the year-end position for tax optimisation.

What if I use a spreadsheet? You need to either switch to MTD-compatible software or use HMRC-recognised bridging software that creates a digital link between your spreadsheet and the HMRC API. For most sole traders, switching to Xero or QuickBooks is simpler and cheaper.

What if I miss a quarterly update? During 2026/27, HMRC will not issue penalty points for late quarterly updates, but you must still submit them. From 2027/28, late submissions are penalised on a points-based system: one point per missed deadline, with a £200 penalty once you reach four points.

Summary

Making Tax Digital for Income Tax is now live for UK sole traders and landlords earning over £50,000, and it extends to £30,000 in April 2027 and £20,000 in April 2028. The first quarterly update was due on 7 August 2026 and the next is due on 7 November 2026.

The key actions: confirm you're in scope, sign up through HMRC, authorise compatible software (Xero or QuickBooks), keep your records digital, and submit every quarterly update on time.

If you need help getting your records into shape, or want someone to handle the quarterly updates on your behalf, get in touch via the contact page.