Making Tax Digital: What sole traders need to know
Last editedDec 20254 min read
The way millions of self-employed people and property owners manage their tax affairs is changing. Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is the largest reform of the UK’s tax system in a generation, and it will soon replace the traditional annual Self Assessment tax return. If you are a sole trader, self-employed, or a landlord, understanding these using the new digital system is essential to avoid penalties and ensure tax compliance. This is a crucial time to prioritiseMaking Tax Digital.
For decades, the standard procedure for annual Self Assessment has been to complete the SA100 form. However, for a growing number of taxpayers, that process is coming to an end.
Making Tax Digital for Income Tax is HMRC’s new initiative to digitalise the tax system, making record-keeping and reporting almost instant. The core change is that your single annual return will be replaced by four quarterly updates throughout the year, followed by an annual final declaration. The timeline: Making Tax Digital is being introduced in phases, with the first wave beginning in April 2026.
Am I affected?
The most urgent question for most people is: When do I need to start making my tax digital?
Sole traders and landlords
Who is impacted:
Sole traders and self-employed individuals.
Landlords who receive property income (both UK and foreign).
Who is excluded (for now): Limited companies are not currently in scope. Ordinary partnerships will be brought into the system at a later, unconfirmed date.
What is 'qualifying income'?
The threshold for joining is based on your qualifying income. This is arguably the most critical definition to understand:
Qualifying income is the gross income (your turnover or earnings) from all self-employment and property letting activities before any expenses or deductions are taken off.
You must combine all income sources that are from self-employment (not PAYE earnings, dividends or savings). For example, if you are a self-employed graphic designer (with £30,000 annual turnover) and also rent out a property (£25,000 gross rent), your combined qualifying income is £55,000.
When Making Tax Digital starts
Compliance with Making Tax Digital for Self Assessment will be phased in based on your qualifying income:
| Start Date | Qualifying gross income (Based on previous tax year) | Tax year compliance is assessed from |
|---|---|---|
| 6th April 2026 (Phase one) | Over £50,000 | 2024/2025 Tax Return |
| 6th April 2027 (Phase two) | Over £30,000 | 2025/2026 Tax Return |
| Future (Expected 2028) | Over £20,000 | 2026/2027 Tax Return |
The Lookback Year: To determine if you are required to comply from April 2026, HMRC will look at the qualifying income reported on your 2024/25 tax return. If that figure is over £50,000, you must join in April 2026.
New process: Quarterly reporting and final declaration
The switch to MTD fundamentally alters the reporting cycle, introducing the real-time self-assessment approach.
Digital record keeping: The foundation
MTD mandates that all records of income and expenditure must be kept digitally. This means moving away from paper files and often ditching manual spreadsheets.
Software vs. Spreadsheets: To comply, records must be kept in HMRC-compatible functional software. If you prefer to use a spreadsheet (like Excel), you must use "bridging software" to digitally transfer the data to HMRC, ensuring a continuous digital journey without manual copying or pasting.
The quarterly updates (The 'real-time self assessment')
Instead of one annual report, you will submit four periodic updates per tax year.
When: You’ll submit updates every three months, following the end of your business's accounting period.
What to report: Totals of income and expenditure for that quarter.
Why: This process provides HMRC and you with a continuous, near-real-time estimate of your tax liability, aiding cash flow and helping you put aside the correct amount of tax.
The year-end process (Replacing the SA100)
The annual submission is broken into two stages:
The End of Period Statement (EOPS): Required for each separate trade or property business, this is where year-end accounting adjustments (e.g., private use of assets, stock adjustments, or capital allowances) are applied.
The final declaration: The one final submission you make as an individual taxpayer. It aggregates all income sources (your Making Tax Digital income, plus non-Making Tax Digital sources like PAYE, pensions, and dividends) and finalises your total tax liability for the year.
Deadline: This final declaration must be submitted by the standard 31st January deadline following the end of the tax year.
Practical preparation: Software and actionable steps
Now is the time for sole traders to prepare for Making Tax Digital.
Choosing your software
You must use software that connects directly to HMRC systems and is recognised by the HMRC. Popular options for self-employed individuals include:
Plus many more
Many of these providers offer packages specifically tailored for sole traders and self-employed users. If you plan to use spreadsheets, you must use a compliant “Bridging software” that digitally takes the information from your spreadsheet and supplies it to the HMRC.
Proactive steps you should take now
Check your threshold: Review your last two tax returns. If your combined gross turnover is near or over £50,000, you are on the 2026 mandate timeline.
Trial digital software: Even if you aren't mandated until 2027 or 2028, start using Making Tax Digital-compatible software voluntarily now. This allows you to get comfortable with digital record-keeping before it becomes a legal requirement.
Consult your accountant: Talk to your accountant or bookkeeper about their transition plan and how it will affect your workflow and fees.
The new penalty system
The introduction of Making Tax Digital will bring in a new, points-based penalty system for non-compliance, applying to both late submissions of the final declaration and failure to meet the quarterly update deadlines. The emphasis is on continuous compliance.
Good to know
Important Self Assessment changes from 2024
Not to be confused with Making Tax Digital, but another big change that hits many self-employed people and partners is the shift to when your tax year lands. The Self Assessment changes for the 2024/2025 tax year mean you must now tax all business profits based on the standard tax year (April to April). Your business’s existing accounting end date no longer matters. This fundamental change is a crucial step to align reporting before the full Making Tax Digital rollout.
Embrace the digital future
Making Tax Digital is a fundamental, permanent change to Self Assessment that you cannot afford to ignore. While the transition requires effort and potentially investment in new software, the shift to digital record-keeping and real-time self-assessment should ultimately lead to fewer errors, better visibility of your tax liability, and streamlined financial management. Start preparing early, consult a professional, and secure your Making Tax Digital-compatible software to ensure a smooth transition and full compliance.
