How Making Tax Digital Impacts Sole Traders

HMRC is introducing MTD to simplify compliance and reduce errors. However, for sole traders, this could mean more paperwork throughout the year, but better financial insights. If you prepare smartly. In this guide, we’ll break down what MTD for sole traders means, share key deadlines, explore its benefits, and provide practical steps to ensure stress-free compliance.

What Does Making Tax Digital Mean For Sole Traders?

MTD for Income Tax is HMRC’s initiative to modernise tax reporting and, ultimately, improve tax accuracy. Rather than submitting a single annual self-assessment return via HMRC’s website, you’ll use MTD-compatible software to maintain digital records of your income and expenses and send quarterly updates. By 31 January each year, you’ll also submit a Final Declaration, a digital summary of your tax year, accounting for any additional income, such as savings or investments.

This digital shift offers sole traders a significant opportunity to streamline their tax processes. By embracing digital tools as part of MTD, individuals can minimise errors, reduce the stress associated with tax compliance, and potentially uncover valuable business insights through better record-keeping and analysis. The key lies in selecting the right software and adapting to a new, more regular reporting schedule.

Already VAT-registered? If your turnover exceeds £90,000 (updated April 2024), you’re likely familiar with MTD for VAT, which has been mandatory since 2019. MTD for Income Tax is a separate system with its own sign-up and requirements.

When Will You Need To Send Quarterly Updates For MTD For Income Tax?

Once MTD for Income Tax applies to you, you’ll submit quarterly updates to HMRC, reporting your cumulative income and expenses. These updates allow corrections from earlier quarters, offering flexibility. Below are the standard tax-year periods and deadlines:

Quarterly updates are based on the following periods and filing deadlines:

• Quarter 1 covers 06 April to 05 July, with a filing deadline of 07 August.
• Quarter 2 covers 06 April to 05 October, with a filing deadline of 07 November.
• Quarter 3 covers 06 April to 05 January, with a filing deadline of 07 February.
• Quarter 4 covers 06 April to 05 April, with a filing deadline of 07 May.

Tips: Use tools like Taxd to stay on track. Our MTD software connects with your bank account using open banking and automatically prepares your quarterly updates. Late submissions earn penalty points, and once you reach four, every additional missed deadline results in a £200 fine.

Benefits Of MTD For Income Tax For the Self-Employed

MTD may seem like an added task, but if embraced with the right technology, it can bring benefits that can enhance your business operations.

Fewer Errors: Manual mistakes can be a headache. MTD software handles calculations and syncs directly with HMRC, ensuring your figures are accurate. For example, a freelancer might avoid miscalculating expenses, saving time and stress during tax season.

Clear Financial Picture: Quarterly updates provide a real-time view of your tax obligations, helping you plan and avoid year-end surprises. Many sole traders find this improves cash flow management, allowing better budgeting for business expenses.

Streamlined Bookkeeping: No longer do you need to scramble at the end of each year to keep track of your finances! MTD encourages ongoing record-keeping with quarterly check-ins. Taxd makes this even simpler by automatically retrieving and sorting transactions as you go along.

Business Insights: Many MTD tools offer dashboards with profit trends, expense analyses, and cash flow forecasts, enabling smarter pricing or cost-saving decisions. A tradesperson, for instance, might use these insights to adjust rates and boost income.

When Does MTD For IT Start For the Self-Employed?

MTD for Income Tax is phased in based on your total gross income from self-employment and property:

• 6 April 2026: Mandatory for income above £50,000.
• 6 April 2027: Mandatory for income above £30,000.
• Future Phases: HMRC may lower the threshold further (likely to £20,000 by 2028).

If your income is nearing a threshold, consider exploring software now to prepare.

Do All Self-Employed People Have To Go Digital?

Not immediately. MTD for sole traders and landlords is mandatory with income above £50,000 (from 2026) or £30,000 (from 2027). If your total business and property income falls below these thresholds, you can continue using HMRC’s existing self-assessment system.

Exemptions apply for:

• Digitally Excluded: Individuals unable to use digital tools due to age, disability, or lack of internet access (e.g., rural areas).
• Foster Carers: Exempt due to their unique income structure.
• No National Insurance Number: Rare cases, such as certain non-residents.

If you believe you qualify, apply for an exemption via gov.uk.

How Do I Sign Up To Make Tax Digital For IT as a Self-Employed Person?

Enrolling in MTD is a straightforward process. While the mandatory rollout for MTD for Income Tax starts in April 2026, you can get ahead of the curve by preparing and even joining voluntarily now. Here’s how to proceed efficiently:

1. Select Your Software:

Choose HMRC-recognised software tailored to your business needs, considering:

• Ease of Use: Prioritise platforms with user-friendly interfaces and mobile applications, enabling expense tracking during business travel or client engagements.

• Features: Opt for software offering invoicing, expense management, direct HMRC integration, and business analytics to enhance financial decision-making.

• Cost: Review pricing structures, which vary depending on functionality, and explore free trials or introductory offers to assess suitability before committing.

• Support: Confirm availability of comprehensive tutorials, responsive customer support, or integration with your accountant for prompt assistance when needed.

Tip: Verify that the software is fully compliant with MTD for Income Tax requirements (and MTD for VAT, if applicable) to ensure smooth operation.

2. Prepare Essential Information:

Collate the necessary details to expedite the registration process. You’ll require:

• Business name and start date.
• National Insurance number.
• Accounting period (typically 6 April to 5 April).
• Accounting basis (cash or accrual, consult your accountant if uncertain).
• Your Government Gateway ID and password (used for your existing HMRC Self Assessment account)

Tip: Store these details securely in a digital or written format and review them with your accountant to ensure accuracy before proceeding.

3. Complete the Enrolment:

Follow the software’s MTD registration instructions, typically a concise process requiring 5-10 minutes during a quiet moment. Most platforms provide clear, step-by-step guidance to connect your account to HMRC using your Government Gateway credentials.

Tip: Trial the enrolment process during a software’s free evaluation period to confirm its ease of use and compatibility with your workflow.

Additional Guidance:

• Begin researching software options early to allow ample time for comparison.

• For those using spreadsheets, be aware that HMRC’s long-term direction is towards full digital record-keeping within MTD-compatible software. While bridging software exists to connect spreadsheets, it’s worth considering a direct software solution for future compliance.

• Engage your accountant to recommend software that aligns with your business and ensures compliance with HMRC standards.

When Should You Start Preparing?

• Now: Research software and consult your accountant.
• 6–12 Months Before Your Mandatory Start Date (or if you choose to join voluntarily): Test your software and begin digital record-keeping.
• 3 Months Before Your Mandatory Start Date (or when you decide to join voluntarily): Enrol in MTD and practise quarterly updates.

What Do I Need to Submit For MTD for IT?

Once MTD applies, you’ll need to:

• Maintain Digital Records: Log all business income and expenses in your software. Paper records are no longer compliant.

• Submit Quarterly Updates: Report cumulative income and expenses per the deadlines above. Errors can be corrected in subsequent updates.

• File a Final Declaration: By 31 January, submit details of all taxable income, including non-business sources like interest or dividends.

How Do I Calculate Income For MTD For IT?

The income thresholds (£50,000, £30,000) include all gross income from self-employment and property. For example:

• Scenario 1 (Single Business & Property): You earn £35,000 freelancing and £20,000 from a rental property. Total = £55,000, so you're required to comply from April 2026 (based on the £50,000 threshold).

• Scenario 2 (Multiple Businesses): You run an online store earning £28,000 and offer consulting services earning £25,000. Total = £53,000, so you're required to comply from April 2026.

• Scenario 3 (Income Below Initial Threshold, Approaching Next One): You earn £45,000 from your freelance work. You won't be mandated in April 2026, but you'll need to monitor your income as the threshold lowers to £30,000 in 2027.

• Scenario 4 (Fluctuating Income): Your income from your creative business was £48,000 last year but is projected to be £52,000 this year. You should prepare for MTD compliance based on your current and projected income.

Can the Self-Employed Opt Out of MTD For IT?

If your income exceeds the relevant threshold, MTD is mandatory unless you qualify for an exemption (see “Do All Self-Employed People Have to Go Digital?” above). You cannot opt out voluntarily if you meet the criteria. Apply for exemptions via gov.uk if you believe you’re eligible due to digital exclusion or other qualifying conditions.

Do the Self-Employed Need To Sign Up For MTD For VAT and MTD For IT Separately?

Yes, MTD for VAT and MTD for Income Tax are separate systems. If you’re VAT-registered (turnover above £90,000), you’re already using MTD for VAT. For MTD for Income Tax, you’ll need to:

• Sign up separately through your software.
• Ensure your software supports both regimes if you’re subject to both.

Key Differences:

• VAT returns are typically quarterly, while Income Tax requires quarterly updates plus a Final Declaration.
• Software requirements may differ, though some platforms streamline both processes.

Tip: Choose software that simplifies compliance for both VAT and Income Tax to save time.

Conclusion

Make Tax Digital for Income Tax represents a dramatic shift, yet offers sole traders an incredible opportunity. By streamlining bookkeeping processes and eliminating costly errors, sole traders can streamline bookkeeping while having greater financial clarity. Begin early, select appropriate software, and involve your accountant--then take one less worry out of tax season!

FAQs

1. Do sole traders need to go digital?

Only those above the income thresholds (£50,000 from 2026, £30,000 from 2027) must adopt MTD for Income Tax. Below these, you can use HMRC’s current system, unless you’re VAT-registered (turnover above £90,000), which requires MTD for VAT.

2. What are the disadvantages of making tax digital?

Potential challenges include the cost of software, the learning curve associated with new systems, and the time needed for regular updates. However, these can be managed with free trials, user-friendly platforms, and weekly 10-minute expense logging sessions.

3. What is classed as a sole trader?

A sole trader is a self-employed individual who runs their own business, retaining all profits after tax and bearing full responsibility for debts. There’s no legal distinction between the owner and the business.