A Complete Guide on Making Tax Digital for Income Tax for Sole Traders

Making Tax Digital, known as MTD, is a programme that moves the UK tax system online. For the millions of sole traders affected, it is one of the biggest changes to how income tax is reported in a generation. 

MTD is introduced in stages, by income. From 6 April 2026, self-employed individuals with a qualifying income over £50,000. Those with a £30,000 gross income are in from April 2027, and those with a £20,000 gross income from April 2028. 

Awareness has lagged behind the timetable. Research conducted in 2026 found that seven in ten sole traders did not know what MTD required of them, and 37% of self-employed people were unaware of the 7 August quarterly deadline.  

With around 4.3 million sole traders currently operating in the UK, the awareness gap is something to ponder. 

This guide closes it. By the end of it, you will understand everything you should know about MTD as a sole trader, what it requires from you, how you can even stay compliant, and the heavy penalty you pay for non-compliance. 

What Is Making Tax Digital for Sole Traders? 

Making Tax Digital for Income Tax (MTD ITSA) is a major change to the way sole traders like yourself used to report your income and expenses to HMRC. Rather than filing your self-employment records, such as invoices, cash receipts, and subcontractor costs, once every year, MTD requires you to record them digitally throughout the year. 

Once this is done, you need to report to HMRC every quarter through an accounting software that links directly to HMRC's systems. 

How Does It Affect the Way I File Taxes? 

Under Self Assessment, HMRC receives a single summary of your entire trading year. By the time you file your return in January, the year it covers has finished nine months ago. MTD changes how you file taxes. 

The invoices you raise, expenses you record, and costs you incur each quarter are summarised and reported to HMRC four times a year (on a quarterly basis). This gives HMRC a clear picture of your tax liability throughout the year, rather than having to calculate everything in January. 

To sum it all up, whether you raise invoices for freelance projects, log daily job costs on a construction site, or track client retainers as a consultant, MTD changes how your self-employment income and allowable expenditure are reported to HMRC. 

Does MTD Apply to You? 

Since April 2026, MTD applies to those with over £50,000 gross qualifying income in the 2024/25 tax year.

As for qualifying income, it is the gross amount your business earned before any business expenses, such as tool costs, fuel, subcontractor payments or professional fees, are deducted. It is your turnover, not your profit.

Qualifying income works the same way for every taxpayer MTD reaches. We cover the full details, including which income types count and which do not, in our main guide to MTD for Income Tax.

What Counts Towards Your Qualifying Income and What Does Not? 

Not everything you earn as a self-employed individual counts towards this figure. Here is what HMRC includes and excludes. 

What if You Are Self-Employed and Also a Landlord? 

If you run a sole trader business and also earn rental income from a property you let out, HMRC does not assess these two income streams in isolation. They are combined when determining whether you cross the qualifying income threshold for MTD. 

How HMRC Treats Each Income Stream Under MTD 

Being in scope as both a sole trader and a landlord does not mean you file one combined report. HMRC requires you to maintain separate digital records for each income stream and report them independently through your MTD compatible software. 

In practice, this means: 

• Your invoices, receipts and business costs from your sole trader work are recorded and reported as your trading income 

• Your rental income and property expenses, such as letting agent fees, maintenance costs and landlord insurance, are recorded and reported separately as property income 

Why Are Sole Traders Required to Use Software for MTD Compliance? 

MTD requires your business records to connect directly to HMRC's systems. You cannot do this manually, which is why software is a legal requirement under MTD, not a choice. 

For many sole traders, that single sentence has triggered real frustration. They signed petitions, flooded forums and voiced the same frustration: being forced to buy software they never needed, to file returns they never had to file, on a timeline set by HMRC. 

What the HMRC data shows, however, is that the experience of using the software tends to contradict the dread that comes before it. The research said that businesses using MTD compatible software saved an average of 33 hours per year on financial admin and record keeping. 

Of those who saved time, 66% used it to become more productive at work and 20% used it to spend more time with family and friends. For every sole trader who found the switch harder, six found it easier.

How Does Switching to Software Make Things Easier?

30% of businesses reported getting more done per hour on their finances after adopting MTD compatible software, compared to only 5% who reported getting less done. For every single sole trader who found it harder, six found it easier. 

What Software Do You Need to Comply? 

To comply with MTD, you have two options: either use a HMRC-compliant accounting software or a spreadsheet combined with bridging software . Let’s explore these two. 

What Are the Three Core Obligations for Sole Traders Under MTD? 

MTD imposes three core obligations on every sole trader within scope.  

Keep your business records digitally 

Report your trading income and expenditure to HMRC every quarter 

Submit a final declaration at the end of the tax year to confirm your total tax liability 

Let’s understand each of them carefully. 

What Records Do You Need to Keep Digitally?

HMRC requires three specific data points to be recorded digitally in the software of your choosing: the date the income was received or the payment was made, the amount, and the category or nature of the income or expense.  

These three data points apply to every transaction in your business. Those transactions will fall into one of two categories. 

Note: The examples below are the most common, but they are not exhaustive. 

You do not need to scan or photograph every receipt. HMRC requires the transaction data to be digital, not the paper documents themselves.  

Your paper receipts can remain as they are, but you should keep them as supporting evidence in case HMRC queries a claimed expense. 

How Do Quarterly Updates Work?

A quarterly update is how you tell HMRC what your sole trader business earned and spent across each three month period of the tax year. 

Think of it as a running summary of your trading activity, the day rates billed to clients, materials bought at the trade counter and subcontractor wages paid out during that quarter, submitted through your software once the quarter closes. 

HMRC divides the tax year into four quarters with fixed submission deadlines. 

At this stage, you are not calculating what tax you owe or making a payment. You are reporting what came in and what went out during a particular quarter. A tiler who completed six jobs between April and July, bought materials and paid a subcontractor is simply summarising that activity and submitting it. The tax calculation comes later, through the final declaration. 

What Is the Final Declaration? 

The final declaration is MTD's replacement for the annual Self Assessment tax return you filed every January. It is where you confirm your total trading income for the year, claim any reliefs or allowances such as the trading allowance, and finalise what you owe HMRC. 

The deadline remains the same: 31 January following the end of the tax year. For the 2026/27 tax year, that means 31 January 2028. 

What changes is the starting point.  

Under Self Assessment, you pulled together a full year of records from scratch every January. But under MTD, your final declaration draws on the four quarterly updates you have already submitted throughout the year, meaning the bulk of the work is done before you reach it. 

Do you still need an accountant under MTD?

MTD does not remove the need for an accountant, but changes what you are paying one for. The software handles the mechanical side, recording transactions and submitting the four quarterly updates, which is work some sole traders previously paid for.

What software cannot do is tell you whether an expense is allowable, how to treat a mixed personal and business cost, or whether you are claiming every relief you are entitled to.

For a sole trader with straightforward income and a handful of expenses, MTD compatible software may be enough to stay compliant on your own. The picture changes if you have property income alongside your trade, run more than one business, or deal with Construction Industry Scheme (CIS) deductions, because the judgement calls multiply and the cost of getting them wrong rises.

Many sole traders keep an accountant under MTD but shift the relationship. Rather than handing over a shoebox of receipts in January, you maintain the digital records yourself throughout the year and your accountant reviews, advises and finalises the declaration.

If you already work with one, agree early who submits the quarterly updates and whether their fee reflects the new pattern of work.

What Are the Penalties for Non-Compliance? 

Missing your MTD obligations as a sole trader carries three categories of financial risk:  

• Penalties for late quarterly submissions,  

• Penalties for paying your tax late and, 

• Penalties for failing to keep digital records.  

Each operates differently and carries its own consequences 

How Does the Late Submission Penalty System Work? 

Miss a quarterly update or final declaration deadline and HMRC issues one penalty point. The system then escalates as follows. 

• Miss one deadline: one penalty point. No financial penalty yet. 

• Miss a second and third deadline: points continue to accumulate, still no fine. 

• Miss a fourth deadline: four points trigger a £200 financial penalty from HMRC. 

• Every late submission after four points: a further £200 penalty per missed deadline. 

• After 24 months: any points below the four-point threshold expire automatically. 

• To reset points after hitting four: submit all returns on time for 12 consecutive months and clear any outstanding submissions from the previous 24 months. 

This system replaced the old £100 automatic fine that sole traders faced for missing the 31 January Self Assessment deadline. The intention is to distinguish between an occasional missed deadline and persistent non-compliance. 

What Are the Penalties for Paying Your Tax Late? 

Three separate penalty regimes apply under MTD, each attached to a different obligation:  

i) late quarterly submissions,  

ii) late payment of tax, and 

iii) failure to keep digital records 

Late submissions run on a points system. Each missed quarterly update or final declaration earns one penalty point, and the fourth point triggers a £200 penalty, with a further £200 for every late submission after that. Points expire after 24 months if you stay below the four-point threshold. 

Late payment is charged separately and from day one. Interest runs from the first day your tax is overdue, and percentage penalties begin once payment is more than 15 days late. There is no points buffer here, the charges apply straight away. 

Failure to keep digital records is a fixed penalty of up to £3,000 per quarter, applied after an HMRC compliance check. This exists independently of your submission record, so a sole trader filing on time but keeping a paper cashbook is still exposed. 

One concession applies for now. HMRC has confirmed a soft landing period for the 2026/27 tax year, so penalty points will not be issued for late quarterly updates submitted in 2026/27 year.

It is narrower than many assume. It covers quarterly updates only, late payment penalties still apply in full, and missing the final declaration deadline of 31 January 2028 still earns a point.

What Are the Exemptions for Sole Traders? 

MTD applies to most sole traders and self-employed individuals within the qualifying income thresholds, but HMRC recognises that certain circumstances can modify or remove that obligation entirely. If any of the following apply to you, you may be exempt from MTD or excluded from the digital service. 

Digital Exclusion 

HMRC can grant an exemption from MTD if it is not reasonably practicable for you to use digital tools. Accepted grounds include: 

• No reliable internet access at your home or place of work 

• A disability that prevents you from using software or digital devices 

• A religious objection to electronic communications 

• Age or a health condition that makes digital record keeping genuinely impractical 

You must apply to HMRC in writing and receive confirmation of your exemption before stopping digital record keeping. It is not self-assessed, and the bar is high. 

Parliament Exemptions, Confirmed in 2025 

HMRC confirmed in 2025 that certain groups are exempt from MTD for the duration of the current Parliament. As a sole trader, this applies to you if either of the following is true. 

• Blind Persons Allowance: if you receive this allowance, you are exempt from MTD regardless of your qualifying income from self-employment. 

• Ministers of religion: if you are a minister of religion with self-employment income, you are exempt from MTD on that income for the duration of the current Parliament. 

These exemptions apply to you as an individual. You must still register for Self Assessment and file an annual tax return in the usual way, but you are not required to comply with the quarterly digital reporting obligations under MTD. 

No National Insurance Number 

If you do not have a National Insurance number, you cannot be enrolled in the MTD digital service. This most commonly affects foreign nationals who have not yet been issued one, or individuals who have never previously engaged with the UK tax system. 

This is a practical exclusion rather than a formal exemption. You are still required to register for Self Assessment, keep appropriate records and submit your tax return to HMRC in the usual way. Only the digital filing requirement does not apply to you. 

If you fall into this category, you should register for Self Assessment using form SA1 and HMRC will issue you a Unique Taxpayer Reference. You can then file through the standard Self Assessment route until a National Insurance number is issued to you. 

Insolvency 

If you enter a formal insolvency process, such as bankruptcy, your MTD obligations are affected. HMRC has specific provisions for taxpayers in insolvency and you should seek professional advice if this applies to you. 

Income That Drops Below the Threshold 

If your qualifying income falls below the relevant threshold in a subsequent tax year, you can exit MTD, but not immediately. HMRC requires three consecutive tax years below the threshold before you can leave the regime. 

For example, if you are a freelance consultant who earned £70,000 last year but lost two major clients this year, bringing your income down to £35,000, you cannot simply stop complying with MTD. You must remain within the regime until your income has stayed below the threshold for three consecutive years.

What can HMRC see under MTD?

HMRC sees four sets of quarterly totals a year: your income and expenses, in the same categories you reported annually before. It does not see your bank account or the individual transactions behind those totals.

What changes is frequency. The figures reach HMRC closer to when the activity happened, so an unusual pattern, a sharp income drop or expenses that run high for your trade, can show up sooner than it would have under annual reporting. The data itself is the three points you already record: date, amount and category.

This is why categorisation matters more under MTD. An error you might once have caught while preparing the annual return now sits in a figure HMRC already holds. You can fix it in a later update, though accurate records from the start avoid the query.

How do you stay compliant with MTD as a sole trader? 

Staying compliant comes down to two things: set up correctly once, then keep your records current through the year. The steps below take you from registration to a routine you can hold each quarter.

You now know what MTD requires. RentalBux handles the rest.

Keep digital records, submit quarterly updates, and file your final declaration all through HMRC-recognised software built for sole traders and landlords. Free to start. No card required.

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