What is Making Tax Digital for Sole Traders?
Making Tax Digital (MTD) for Income Tax is HMRC's biggest shake-up of the Self Assessment system in decades. If you are self-employed with income above £50,000, you are required to be compliant from April 2026.
What exactly is MTD for Income Tax?
Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) replaces the single annual Self Assessment tax return with a new system of four quarterly updates per year, submitted digitally through HMRC-approved accounting software.
Instead of filling in one return at the end of the year, you now maintain digital records throughout the year and send HMRC a summary of your income and expenses every three months. At the end of the year, you confirm these figures in a Final Declaration: which is similar to your old Self Assessment return.
Who must use MTD?
MTD applies to you if your qualifying gross income (combined self-employment and property rental) exceeds the thresholds below:
- April 2026: Qualifying income over £50,000 (already mandatory)
- April 2027: Qualifying income over £30,000
- April 2028: Qualifying income over £20,000
Your qualifying income is your gross (before expenses) income from self-employment plus any property rental income. It does not include employment wages or investment income.
What software do I need?
You must use HMRC-recognised MTD-compatible software to keep records and submit your quarterly updates. Popular options include FreeAgent (which is excellent for freelancers and sole traders, and free with NatWest, RBS, or Ulster Bank business accounts), QuickBooks, Xero, and Sage Accounting.
What happens if I miss the deadline?
HMRC uses a points-based penalty system for MTD. Each missed quarterly submission earns one penalty point. When your total points reach the threshold (currently 4 for quarterly filers), you receive a £200 fine. Points reset after a period of full compliance.
Check your start date and get ready using our MTD Readiness Checker.