How Making Tax Digital works for sole traders, step by step

Making Tax Digital for Income Tax Self Assessment (MTD ITSA) is being phased in by qualifying income. As a sole trader you are brought into the rules on these dates:

• From 6 April 2026 — qualifying income over £50,000
• From April 2027 — qualifying income over £30,000
• From April 2028 — qualifying income over £20,000

“Qualifying income” is your gross income — your total turnover before you deduct any expenses — from self-employment and any UK property, added together. It is not your profit. HMRC looks at the figures on your most recently filed Self Assessment return to decide whether and when you must join, and will write to you if you are in scope. If you run a trade turning over £48,000 and also let a room bringing in £6,000, your qualifying income is £54,000 — over the £50,000 threshold — even though your taxable profit may be far lower.

Check your MTD start date in 60 seconds →

Self-employment income is everything earned from a trade you carry on personally as an unincorporated business — whether you are a tradesperson, consultant, freelancer, delivery driver or online seller. All of it is reported quarterly under MTD for Income Tax.

If you run more than one trade, each is reported as a separate source in your software, with its own income and expenses, so your figures stay distinct. Property income is also reported separately from your trade. Employment income (PAYE), pensions, dividends and savings interest are not reported through quarterly updates — they are brought together once a year at your final declaration.

The heart of MTD is digital record-keeping. From the start of your first MTD tax year you must record, in compatible software or a spreadsheet linked to bridging software:

• every item of business income — the date, the amount and the category;
• every allowable expense, categorised so it maps to the right box at year end;
• any adjustments needed to arrive at your taxable profit.

Records must be captured at, or close to, the point of each transaction — not reconstructed from a shoebox of receipts the following January. There must be a digital link from your records through to the figures you submit, so no number is retyped by hand. You should keep these records for at least five years after the 31 January submission deadline, in line with normal Self Assessment rules.

Since the 2024–25 tax year the cash basis is the default for most sole traders. Under the cash basis you record income when money actually reaches you and expenses when you actually pay them — which is simpler and usually matches how a small business already thinks about its money.

You can choose accruals (traditional) accounting instead if it suits your business — for example if you invoice on longer terms or carry stock. Whichever you use, your software must be set up to reflect it so that your quarterly figures and final declaration are calculated correctly.

MTD does not change which expenses you can claim — the normal “wholly and exclusively for the business” test still applies. What changes is that every expense must be recorded digitally, categorised, and traceable back to its source. Typical categories include stock and materials, travel and vehicle costs, premises, phone and internet, insurance, and professional fees.

You can still use simplified (flat-rate) expenses for things like vehicle mileage or use of home, provided your software supports the adjustment. Keeping expenses categorised correctly through the year is what makes your quarterly updates quick and your year-end figure accurate.

Instead of one annual return, MTD asks for a short quarterly update— a running summary of your income and expenses for each source, sent from your software. Using the standard quarters, the periods and deadlines are:

• 6 April – 5 July — due 7 August
• 6 July – 5 October — due 7 November
• 6 October – 5 January — due 7 February
• 6 January – 5 April — due 7 May

The updates are cumulative, so each one restates the year to date and a mistake in an early quarter is simply corrected in the next. You are notpaying tax or making a final claim at this stage — the updates give HMRC (and you) a running estimate. If it suits your bookkeeping better, you can elect to use calendar quarters ending 30 June, 30 September, 31 December and 31 March instead.

After the fourth quarter you complete a final declaration through your software. This replaces the traditional Self Assessment tax return. It finalises your business profit, then brings in everything else — employment income, pensions, dividends, savings interest, and any reliefs or allowances — to arrive at your final tax position for the year.

The final declaration is due by 31 January following the end of the tax year, the same date you are used to, and your tax is payable then as now. In practice MTD spreads the record-keeping across the year so that this final step is a review rather than a scramble.

MTD ITSA uses a points-based system for late quarterly updates. Each missed deadline earns a point; once you reach the points threshold for your submission frequency HMRC charges a £200 penalty, with further £200 charges for continued lateness. Points expire after a period of compliance. Late payment of tax is charged separately, with interest and escalating penalties the longer it is outstanding.

The practical takeaway: the deadlines are frequent, so the safest approach is to keep records up to date and let your software submit on time. If you have already fallen behind, act quickly to limit the points and interest that build up.

Getting MTD-ready is straightforward if you tackle it in order:

• Confirm your start date from your qualifying income (see above).
• Choose HMRC-recognised software — or a spreadsheet plus bridging software — that supports your trades and accounting basis.
• Set up your digital records and start capturing income and expenses from day one of your first MTD year.
• Sign up for MTD through your HMRC account and connect your software.
• Decide who does the work — yourself, or an adviser who can register you and file each quarter.

See how we set up your MTD software →