Making Tax Digital for Sole Traders

What Is Making Tax Digital for Sole Traders?

Making Tax Digital (MTD) is HMRC’s major initiative to move the UK tax system online. As part of this, sole traders who meet certain income thresholds will soon need to:

• Keep digital business records

• Use MTD-compatible software

• Submit quarterly updates to HMRC

• File an End-of-Period Statement and Final Declaration instead of an annual Self-Assessment return

This new system is known as MTD for Income Tax Self Assessment (MTD ITSA), and it's compulsory from April 2026 for many sole traders.

When Does MTD Start for Sole Traders?

Start Date	Who It Affects
April 2026	Sole traders with gross income over £50,000
April 2027	Sole traders with gross income over £30,000

💡 Gross income means turnover before deducting expenses — not your net profit.

If your gross income from self-employment exceeds these thresholds, you’ll be legally required to follow MTD rules.

What Does MTD Involve for Sole Traders?

If you’re a sole trader who falls under MTD, here’s what you’ll need to do:

✅ 1. Keep Digital Records

You must maintain digital records of your business income and expenses using HMRC-approved software.

✅ 2. Submit Quarterly Updates

Every three months, you’ll submit a summary of your income and expenses to HMRC. These updates replace the need to report your income once a year.

✅ 3. Submit an End-of-Period Statement (EOPS)

At the end of the tax year, you’ll finalise your data for each business and claim any tax reliefs or adjustments.

✅ 4. Submit a Final Declaration

This replaces the traditional Self Assessment return and brings together all your income, including self-employment, property, dividends, etc.

🗓️ The final deadline remains 31 January following the end of the tax year.

What Software Can Sole Traders Use?

HMRC requires all MTD submissions to be done via compatible software. Popular MTD software for sole traders includes:

Software	MTD ITSA Ready	Mobile App	Free Option Available
FreeAgent	✅	✅	Yes (via Mettle/NatWest)
QuickBooks	✅	✅	No
Xero	✅	✅	No
Untied	✅	✅	Yes
Sage Accounting	✅	✅	Yes (Sage Individual – coming soon)

📌 We recommend starting with a free plan to get comfortable with digital bookkeeping before MTD becomes mandatory.

What Income Counts Towards the MTD Threshold?

If you're a sole trader, your gross self-employed income is what matters — not your taxable profit.

If you're also a landlord, your combined gross income from self-employment and property will determine whether you're within the scope of MTD.

Example:

• Sole trader income: £32,000

• Property income: £22,000

• Combined income = £54,000 ➜ MTD applies from April 2026

What Happens If You Don’t Comply?

From April 2026, HMRC will introduce a points-based penalty system. If you miss filing deadlines:

• You earn points

• Points eventually lead to fines

• The more frequent your non-compliance, the higher the penalties

Avoiding these penalties is easy if you plan ahead and choose your software early.

Do Sole Traders Still Need an Accountant?

You can continue working with an accountant under MTD — and in many cases, it's advisable. However, the key difference is that you must use compatible software to keep and submit your data.

Your accountant can:

• Help you set up your MTD software

• File quarterly and annual submissions

• Advise on allowable expenses and tax reliefs

Final Checklist for Sole Traders

✅ Track your gross income

✅ Choose MTD-compatible software

✅ Start keeping digital records now

✅ Prepare for quarterly submissions

✅ Consult an accountant if you need help

Final Thoughts

Making Tax Digital is a major shift for sole traders, but it doesn’t have to be overwhelming. With the right tools and a little preparation, it can actually help you streamline your business finances and reduce the stress of last-minute tax returns.

The earlier you start preparing, the smoother your transition will be.