MTD for Income Tax: what sole traders need to do

For most sole traders, Making Tax Digital (MTD) for Income Tax changes how you keep records and how often you report, not how much tax you pay. Instead of one annual return built from a year’s paperwork, you keep records in software as you go, send four short updates a year and file the return from the same software.

Do you need to join?

You need to use MTD for Income Tax if you are self-employed or a landlord, registered for Self Assessment, and your qualifying income is over the threshold:

Qualifying income is your turnover, not profit. A plumber with £42,000 of sales and £15,000 of costs has qualifying income of £42,000. Income from employment, pensions, dividends and partnerships does not count. See the MTD timeline.

What changes for a sole trader

1. Digital records

You must record each item of business income and expense in MTD-compatible software, with the date, amount and category, as the year goes on. You can still use paper receipts and invoices as evidence, but the record itself must be digital. Many sole traders photograph receipts in an app and use a bank feed. See digital record keeping for MTD.

2. Quarterly updates

Four times a year your software adds up your records into totals for each income and expense category and sends them to HMRC:

Updates are cumulative, so you can correct earlier figures in the next update. You do not need to make accounting adjustments, such as for private use or capital allowances, in the quarterly updates. You must send an update even if there was no income or spending.

3. The tax return through software

After the year ends you add any adjustments (private use, capital allowances, losses, other income such as interest or a salary) and submit your tax return through the software by 31 January. Payment dates are unchanged: balancing payment and first payment on account on 31 January, second payment on account on 31 July. See payments on account.

What does not change

• The tax you pay: the same Income Tax and Class 4 National Insurance rules apply.
• Allowable expenses: the same rules; see sole trader expenses.
• Cash basis: still the default for most sole traders, and works within MTD.
• Trading allowance: you can still use the £1,000 trading allowance instead of expenses.
• Accounting date: most sole traders now use accounts to 5 April or 31 March after basis period reform; if your year end is different, you still report on a tax year basis.

Penalties

• 2026/27: no penalty points for late quarterly updates, but you must send them before you can file the return.
• From 2027/28: one penalty point for each missed quarterly update deadline; at four points you are charged £200, and £200 for each further missed deadline.
• Tax return: a missed 31 January deadline earns a point from the first year.
• Late payment: 3% of tax unpaid at day 15, a further 3% at day 30 and 10% a year after that in 2026/27 (4% at each step from 2027/28), with an extra 15 days’ grace in your first year.

Getting ready: a checklist

1. Check your qualifying income for the relevant year, adding self-employed turnover and gross rents.
2. Choose software that suits your business. Options range from free and low-cost apps for simple businesses to full accounting packages; see MTD software requirements.
3. Open a separate business bank account if you have not already, so bank feeds are clean.
4. Sign up through GOV.UK, or ask your accountant to sign you up and act as your agent.
5. Start keeping records digitally from the first day of your first MTD tax year.
6. Put the quarterly deadlines in your diary, or set reminders in the software.

Should you join early?

You can volunteer before you are required to. Joining early gives you a year to get used to the software without the risk of penalties for quarterly updates. Volunteers have their own penalty rules; check them before you sign up.

Frequently asked questions

Do I need MTD for Income Tax if I am a sole trader earning £40,000?

If your gross self-employment and property income is over £30,000 in 2025/26, you must join from 6 April 2027. If it is over £50,000 in 2024/25, you should already have joined from April 2026.

Can I still use spreadsheets for MTD for Income Tax?

Yes, if you use bridging software that connects the spreadsheet to HMRC and keeps digital links between your records and the submission.

Will MTD increase my tax bill?

No. It changes record keeping and reporting, not tax rates or allowable expenses.

Do I still need a Self Assessment return?

You still file a tax return each year, but through MTD-compatible software instead of HMRC’s old online form.