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 income above £50,000

This guide covers both, with a focus on what you need to do now if you're a sole trader approaching or above the £50,000 threshold.

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 from April 2026?

Mandatory from 6 April 2026:

• Self-employed sole traders with qualifying income over £50,000 per year
• Landlords with qualifying income (property rental income) over £50,000 per year
• If you have both self-employment and rental income that together exceed £50,000, you are in scope

Mandatory from 6 April 2027:

• Sole traders and landlords with qualifying income over £30,000 per year

Still to be confirmed:

• HMRC has committed to extending MTD ITSA to businesses with income over £20,000 in a future phase — no confirmed date yet as of mid-2026.

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 current threshold for their mandation 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 mandation.

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 deadline is 7 August 2026 — covering 6 April to 5 July 2026.

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 end-of-year declaration.

3. End-of-year declaration

After the fourth quarter, you make a final "End of Period Statement" (EOPS) declaring your income and expenses for the full year, plus a final declaration to complete your tax position. This replaces the traditional Self Assessment return.

The deadline for the end-of-year declaration is 31 January — the same as the current Self Assessment filing deadline.

What Software Do You Need?

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

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-Free Grace Period (2026/27)

HMRC has confirmed that the first year of MTD ITSA mandation (2026/27, starting April 2026) will include a penalty-free grace period. This means:

• HMRC will not issue late-submission penalties for missed quarterly updates during 2026/27 for businesses in their first year of mandation
• The intent is to give businesses time to adapt to the new system
• You are still required to comply — the grace period covers penalties, not the obligation itself

This does not mean you can ignore MTD ITSA until 2027. It means that genuine errors and late submissions in the first year are unlikely to result in fines. Deliberate non-engagement or failure to register is a different matter.

What You Need to Do If You're in Scope

Step 1: Confirm you're in scope Check your qualifying income for the most recent full tax year. If it's above £50,000, you were 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 your first quarterly update by 7 August 2026 This covers 6 April – 5 July 2026. The submission takes minutes in Xero or QuickBooks — it's a summary of what's already in your records. The preparation is the work.

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 end-of-year declaration replace the annual Self Assessment return. But the deadline and the tax calculation 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 the 2026/27 grace period, HMRC has indicated it will not issue automatic late-filing penalties. From 2027/28, late submission penalties will apply on a points-based system — similar to the current MTD VAT penalty regime.

Summary

Making Tax Digital for Income Tax is now live for UK sole traders and landlords earning over £50,000. The first quarterly submission is due 7 August 2026 for the April–June quarter.

The key actions: confirm you're in scope, sign up through HMRC, authorise compatible software (Xero or QuickBooks), ensure your records have been digital since 6 April, and submit by the August deadline.

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