What is Making Tax Digital for sole traders?
Making Tax Digital (MTD) is HMRC's programme that requires sole traders to keep digital records and send tax updates to HMRC four times a year using compatible software. Rather than filing one annual Self Assessment return, completed by 11.48 million taxpayers in 2024–25, you'll submit quarterly summaries of your income and expenses, then wrap everything up with a Final Declaration at year-end.
The system works through three main parts:
Digital records: All your business income and expenses stored in MTD-compatible software
Quarterly updates: Summaries sent to HMRC every three months
Final Declaration: A year-end submission that takes the place of your traditional tax return
HMRC built MTD to cut down on the 43% of business returns containing errors and help you see where you stand with tax throughout the year. The programme already applies to VAT-registered businesses, and Income Tax is the next phase.
For sole traders, this means moving away from paper records and spreadsheets toward software that talks directly to HMRC's systems.
Top Tip: If you're new to digital bookkeeping, Tide's free MTD-ready tools show how automated record-keeping works in practice.
Does Making Tax Digital apply to self-employed sole traders?
Yes, MTD for Income Tax Self Assessment covers self-employed individuals whose qualifying income goes above certain thresholds. This includes freelancers, contractors, and anyone else running their business as a sole trader. Landlords with property income fall under the same rules.
The groups affected are:
Self-employed sole traders with qualifying income above the threshold
Landlords with property income above the threshold
Individuals with combined self-employment and property income that exceeds the threshold
If you fit into any of these categories and your income is high enough, you'll be required to use MTD instead of continuing with traditional Self Assessment.
How to calculate your qualifying income for MTD
Your qualifying income is your gross income or turnover before you take off any expenses – not your profit. If you earn from both self-employment and property rental, you add both gross figures together.
Gross turnover: Total business income before expenses
Property income: Total rental income before allowable deductions
Combined total: Both figures added together to work out your threshold
Say your self-employment brings in £35,000 and you receive £20,000 from a rental property. Your qualifying income would be £55,000 – well above the initial threshold.
When does MTD for Income Tax start?
April deadline for income over £50,000
The first mandatory date is April 2026. 864,000 sole traders and landlords with qualifying income over £50,000 in the 2024-25 tax year will start using MTD from this point.
April deadline for income over £30,000
From April 2027, the rules extend to those with qualifying income over £30,000. This second phase brings a much larger group of sole traders into the MTD system.
Future expansion to lower income thresholds
HMRC has mentioned plans to eventually include those earning above £20,000, with a provisional date of April 2028. However, this hasn't been formally confirmed yet.
Income threshold | Compliance start date |
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Latest Making Tax Digital updates for sole traders
HMRC has made several recent changes to MTD for Income Tax. The income thresholds were raised from earlier proposals, and the rollout dates were pushed back to give businesses more preparation time.
Recent changes include revised thresholds of £50,000 and £30,000 with confirmed start dates, an updated penalty points system designed to be fairer for occasional mistakes, and new guidance on software requirements along with the official sign-up process.
Top Tip: Bookmark HMRC's official MTD guidance to stay informed about future changes.
Who is exempt from Making Tax Digital?
Digital exclusion exemptions
HMRC may grant an exemption if you cannot use digital tools due to age, disability, or living somewhere with poor internet access. These exemptions recognise that not everyone can reasonably be expected to go digital.
Religious objections
Exemptions are available for individuals whose religious beliefs are incompatible with using electronic communications or keeping electronic records.
Insolvency and other circumstances
Additional exemptions can apply to businesses in insolvency proceedings, individuals in care, or those with a Power of Attorney managing their affairs. Exemptions aren't automatic – you'll need to apply directly to HMRC, who review each case individually.
How MTD differs from Self Assessment
Making Tax Digital changes both how often you report and how you do it. While Self Assessment involves one annual submission, MTD spreads the workload across the year.
Feature | Self Assessment | Making Tax Digital |
|---|
| | Quarterly plus Final Declaration |
| | Digital only (MTD-compatible software) |
| | Quarterly deadlines plus year-end |
| | Software calculates automatically |
What records you need to keep digitally
Income and expense categories to track
You'll need to digitally record all transactions related to your business. This covers sales and business income, allowable expenses by category (travel, office costs, stock, and so on), plus bank interest and other income sources.
Receipt capture and storage requirements
Digital copies of receipts and invoices for business expenses are required. A clear photograph stored within your MTD software works fine – you don't need to keep paper originals.
How auto-categorisation reduces manual work
Modern MTD software can connect to your bank account and automatically sort transactions into HMRC's required categories. This cuts down significantly on manual data entry and admin time. An integrated business account that auto-categorises transactions can save hours of manual bookkeeping each month.
When MTD quarterly updates are due
Quarterly update periods
The standard quarterly periods follow the UK tax year:
Quarter 1: 6 April to 5 July
Quarter 2: 6 July to 5 October
Quarter 3: 6 October to 5 January
Quarter 4: 6 January to 5 April
Submission deadlines for each quarter
Each quarterly submission deadline falls one month after the quarter ends. So the update for Quarter 1 (ending 5 July) would be due by 5 August.
What is the Final Declaration?
The Final Declaration takes the place of your traditional Self Assessment tax return. This is where you confirm your total income from all sources, claim allowances and reliefs, and finalise your tax liability for the year.
Purpose: Finalise your tax position and confirm the accuracy of quarterly submissions
Deadline: 31 January following the end of the tax year
What it includes: Final adjustments, claims for tax reliefs, and confirmation of quarterly data
What software sole traders need for MTD
What makes software MTD-compatible?
For software to be MTD-compatible, it needs to connect to HMRC's systems via an API, maintain digital records as required, and submit quarterly updates and the Final Declaration directly to HMRC.
Why integrated banking and accounting tools work best
Software that connects directly to your business bank account offers the smoothest experience. Transactions import automatically, categorisation happens in real-time, and you get a live view of your finances without switching between apps.
Can you use spreadsheets for MTD?
Spreadsheets alone won't work for MTD because they can't communicate with HMRC's systems. You'd need additional "bridging software" to submit your data, which adds complexity and room for errors.
Top Tip: Tide Accounting's free MTD tools are HMRC-recognised and built directly into your business account.
How to sign up for Making Tax Digital
1. Check your Government Gateway account
You'll need a Government Gateway user ID and password linked to your Self Assessment record before signing up.
2. Verify your business details
Make sure your National Insurance number, Unique Taxpayer Reference (UTR), and other business information match HMRC's records.
3. Choose your MTD-compatible software
Select an HMRC-recognised software provider before starting the sign-up process – you'll need to link it during registration.
4. Authorise your software with HMRC
During sign-up, you'll grant your chosen software permission to interact with HMRC on your behalf. This securely connects the two systems.
5. Submit your first quarterly update
Once signed up, you'll no longer file a Self Assessment return. Start keeping digital records and submit your first quarterly update by the relevant deadline.
Penalties for not complying with MTD
Late submission penalties
HMRC uses a points-based system for late submissions. You receive one penalty point for each missed deadline, and once you hit the threshold, a financial penalty applies.
Late payment penalties
Paying tax late triggers separate penalties, charged as a percentage of the overdue amount. The longer payment remains outstanding, the higher the penalty.
How the points-based penalty system works
The system is designed to be less harsh for occasional mistakes. Points build up for each missed deadline, and the threshold is 4 points for quarterly submissions. A £200 penalty applies once you reach the threshold, though points expire after a period of sustained compliance.
How much MTD compliance costs
Software subscription costs
Most MTD software providers charge monthly or annual fees, and costs vary significantly based on features and provider.
Free MTD tools available to sole traders
Some providers, including Tide, offer free HMRC-recognised MTD tools as part of their business accounts. This removes software subscription costs entirely.
Hidden costs to consider
Beyond software fees, factor in time spent learning new systems, potential accountant support, or bridging software costs if you prefer using spreadsheets.
Benefits of Making Tax Digital for sole traders
Real-time visibility of your tax position
Digital records give you an up-to-date view of income, expenses, and estimated tax liability throughout the year – no more surprises come January.
Reduced year-end stress
Spreading admin across four quarterly submissions avoids the traditional January rush and the stress that comes with it.
Fewer errors and penalties
Automated calculations and digital record-keeping reduce manual errors that can lead to incorrect payments or HMRC penalties.
Better cash flow planning
Knowing your estimated tax liability in advance makes it easier to set aside the right amount, preventing cash flow surprises.
How to prepare for Making Tax Digital now
1. Start keeping digital records today
Building good habits now, like finding a consistent way to track your expenses, makes the transition smoother, even if your deadline is still months away.
2. Choose MTD-compatible software
Research and select your software early. This gives you time to get comfortable before compliance becomes mandatory.
3. Connect your business bank account
Linking your bank account enables automatic transaction imports – a key step in automating your bookkeeping.
4. Set up auto-categorisation for transactions
Take advantage of features that automatically sort income and expenses into HMRC's required categories.
5. Run a test quarter before the deadline
Try completing a practice quarterly update before MTD becomes compulsory. This helps identify any gaps in your process ahead of time.
How integrated banking and tax tools simplify MTD compliance
All-in-one platforms that combine business banking, bookkeeping, and tax filing dramatically reduce friction and admin time.
Automatic transaction imports: Bank transactions appear in your accounting software without manual entry
Real-time categorisation: Transactions are sorted into correct tax categories as they happen
Built-in tax estimates: See an up-to-date estimate of your tax liability throughout the year
Direct HMRC filing: Submit quarterly updates and your Final Declaration without leaving the app
Tide offers these integrated features at no extra cost, making MTD compliance straightforward and affordable for sole traders.
