Making Tax Digital 2026: The Complete Guide for UK Sole Traders

After years of delays, postponements, and pilot programmes, Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is finally arriving. From April 2026, the way hundreds of thousands of sole traders and landlords report their income to HMRC will fundamentally change. If you are self-employed in the UK, this is the single most important tax change you need to prepare for this year.

This guide covers everything: who is affected, what you need to do, the software you will need, the penalties for getting it wrong, and a step-by-step plan to get yourself ready before the deadline.

What Is Making Tax Digital?

Making Tax Digital is HMRC’s long-running programme to move the UK tax system from annual paper and online returns to a digital-first, real-time reporting model. The idea is straightforward: instead of filing one Self Assessment tax return each year, you will keep digital records throughout the year and send quarterly summaries to HMRC using compatible software.

MTD already applies to VAT-registered businesses. If you are VAT-registered, you have likely been filing digital VAT returns since 2019. MTD for Income Tax extends this same principle to income reported through Self Assessment — primarily self-employment income and property income.

The key shift is from annual reporting to quarterly reporting. You will still have an annual declaration at the end of the tax year, but HMRC will receive updates about your income and expenses four times a year rather than waiting for everything to land in a single January tax return.

Who Does MTD for Income Tax Affect?

MTD for Income Tax is being rolled out in two phases based on your total qualifying income:

Phase 1 — From 6 April 2026

You must comply with MTD for Income Tax if your total gross income from self-employment and/or property exceeds £50,000 in a tax year. This is based on your turnover (gross income), not your profit. If you earn £55,000 in self-employment income but your taxable profit after expenses is only £30,000, you are still caught by the £50,000 threshold.

Phase 2 — From 6 April 2027

The threshold drops to £30,000. If your combined self-employment and property income exceeds £30,000, you will need to comply from this date.

Who Is Not Affected (Yet)?

Those with qualifying income below £30,000 are not currently required to join MTD for Income Tax. HMRC has indicated it intends to bring in those earning above £20,000 at some future date, but no firm date has been set. Partnerships are also excluded from the initial rollout, though they are expected to be brought in later.

If you are an employee who also does some freelance work on the side, and your self-employment income is below the threshold, you do not need to comply. However, if your combined self-employment and property income crosses the threshold, you do.

What Counts as Qualifying Income?

Qualifying income includes:

• Self-employment income — your total turnover from all sole trader businesses
• Property income — rental income from UK and overseas property

It does not include employment income, pension income, savings interest, or dividend income. These are reported separately and are outside the scope of MTD for ITSA.

What Changes Under MTD?

There are three core obligations under Making Tax Digital for Income Tax:

1. Digital Record Keeping

You must keep your business records digitally using MTD-compatible software. This means your income and expenses need to be recorded in a software package that can communicate with HMRC’s systems via their Application Programming Interface (API). Spreadsheets alone will not be sufficient unless they are linked to compatible bridging software.

2. Quarterly Updates

You must send HMRC a summary of your business income and expenses every quarter. The quarterly periods align with the tax year:

Quarter	Period	Deadline
Q1	6 April – 5 July	7 August
Q2	6 July – 5 October	7 November
Q3	6 October – 5 January	7 February
Q4	6 January – 5 April	7 May

Each quarterly update must be submitted by the 7th of the month following the end of the quarter. These are summaries of income and expenses — not full tax calculations. Think of them as progress reports rather than mini tax returns.

3. End of Period Statement and Final Declaration

After the end of the tax year, you must submit an End of Period Statement (EOPS) for each source of income, confirming your figures are complete and accurate. You then submit a Final Declaration, which replaces your current Self Assessment tax return. The Final Declaration is where you include any other income, claim reliefs, and finalise your tax liability.

The deadline for the Final Declaration is 31 January following the end of the tax year — the same deadline you currently have for Self Assessment.

Compatible Software

You cannot use HMRC’s own online Self Assessment service for MTD quarterly updates. You must use third-party software that is MTD-compatible. HMRC maintains a list of recognised software providers on GOV.UK, but some of the most widely used options include:

Free or Low-Cost Options

• HMRC’s MTD-compatible software — HMRC is working with providers to ensure free options are available for those with straightforward affairs
• FreeAgent — popular with freelancers, offers a clean interface and bank feed integration (free through some business bank accounts such as NatWest, Royal Bank of Scotland, and Mettle)
• TaxScouts — offers a combined software-and-accountant service at a competitive price point

Paid Options

• Xero — one of the leading cloud accounting platforms, MTD-compatible, starting from around £17/month
• QuickBooks Self-Employed — Intuit’s offering for sole traders, from around £8/month
• Sage Accounting — long-established UK accounting software with MTD support, from around £14/month
• GoSimpleTax — specifically designed for Self Assessment and MTD, pay-per-use model available
• Coconut — designed for sole traders with a focus on simplicity and expense tracking
• Hammock — built specifically for landlords managing rental property income

Before choosing software, check that it is listed on HMRC’s official compatible software page and that it supports quarterly updates for ITSA, not just VAT.

Penalties for Non-Compliance

HMRC is introducing a new points-based penalty system for MTD. This replaces the old fixed-penalty regime and is designed to be more proportionate:

Late Submission Penalties

Each time you miss a quarterly update or filing deadline, you receive one penalty point. Once you reach the penalty points threshold, you receive a £200 penalty for that late submission and for every subsequent late submission until you bring your compliance up to date.

The threshold for quarterly reporters is four points. This means you effectively get four “free” late submissions before penalties kick in. However, once you have hit the threshold, every missed deadline costs you £200.

To reset your points back to zero, you must meet all filing obligations on time for a continuous 24-month period.

Late Payment Penalties

Late payment of tax attracts separate penalties:

• Up to 15 days late — no penalty
• 16 to 30 days late — a penalty of 2% of the tax owed at day 15
• 31 days or more late — a further 2% of the tax owed at day 30, plus a daily rate of 4% per annum on the outstanding balance

Interest also accrues on late-paid tax at the HMRC late payment interest rate, which fluctuates with the Bank of England base rate.

How to Sign Up for MTD for Income Tax

If you are already registered for Self Assessment, HMRC will write to you in advance of the April 2026 start date if you are in scope. However, you do not need to wait for HMRC to contact you. You can sign up proactively.

Step-by-Step Setup Guide

Step 1: Check whether you are in scope. Look at your total self-employment and property income for the 2024/25 tax year. If it exceeds £50,000, you are in the first wave from April 2026.

Step 2: Choose your software. Research MTD-compatible software and pick one that suits your business. If you already use cloud accounting software like Xero, QuickBooks, or FreeAgent, check with your provider — most major platforms are already MTD-ready or will be by April 2026.

Step 3: Get your digital records in order. Start recording income and expenses digitally now if you are not already doing so. The sooner you establish good habits, the easier the transition will be. Connect your business bank account to your software to automate transaction recording.

Step 4: Sign up through your software or HMRC. Your software provider will guide you through the sign-up process. You will need your Government Gateway credentials and your Unique Taxpayer Reference (UTR). The sign-up process links your HMRC account to your chosen software.

Step 5: Authorise your software. Once signed up, you will need to grant your software permission to interact with HMRC on your behalf. This is done through a secure authorisation process within the software.

Step 6: Start submitting quarterly updates. From 6 April 2026, begin recording income and expenses in your software. Your first quarterly update (covering 6 April to 5 July 2026) will be due by 7 August 2026.

Step 7: Submit your End of Period Statement and Final Declaration. After 5 April 2027, finalise your records, submit your EOPS, and make your Final Declaration by 31 January 2028.

If You Use an Accountant

If you have an accountant or tax adviser, speak to them now. They can sign you up for MTD, help you choose software, and manage quarterly submissions on your behalf. Many accountants are already building MTD processes into their service offerings. Be aware that some may charge more for the additional quarterly reporting work.

Common Questions

Do I still need to file a Self Assessment tax return?

The Final Declaration under MTD effectively replaces your Self Assessment tax return. However, if you have other income sources outside the scope of MTD (such as capital gains or foreign income), these will still need to be reported through the Final Declaration. The process is different, but the end result is similar.

Can I use spreadsheets?

You cannot use a standalone spreadsheet. However, you can use a spreadsheet that is connected to HMRC’s systems via bridging software. Several providers offer this. That said, using purpose-built MTD software is likely to be simpler and less error-prone.

What if my income fluctuates above and below the threshold?

The threshold is based on your qualifying income in the previous tax year. If your income was above £50,000 in 2024/25, you must comply from April 2026 even if your income drops below £50,000 in 2025/26. If your income was below the threshold, you are not obligated to join — though you can volunteer.

What about the cash basis vs accruals?

You can use either the cash basis or traditional accruals basis for your quarterly updates. Most sole traders with straightforward affairs use the cash basis, which records income when received and expenses when paid. This is often simpler for quarterly reporting.

Will MTD change how much tax I pay?

No. MTD changes how and when you report your income, not how much tax you owe. Your tax liability is still calculated on your annual profit in exactly the same way. However, the increased visibility of your income throughout the year may help you budget more effectively and avoid year-end surprises.

What if I cannot afford software?

HMRC has committed to ensuring that free software options are available for those with the simplest tax affairs. Additionally, the cost of MTD-compatible software is itself an allowable business expense that you can deduct from your profits.

I am a landlord with a day job. Does MTD apply to me?

If your property income exceeds the relevant threshold (£50,000 from April 2026, £30,000 from April 2027), then yes, you must comply with MTD for your property income even if you are also employed. Your employment income is not affected — your employer continues to handle that through PAYE.

Practical Tips for a Smooth Transition

Start now, not in April. The biggest risk is leaving everything to the last minute. Choose your software, set up your digital records, and get comfortable with the process before the obligation kicks in.

Automate bank feeds. Connect your business bank account to your accounting software. This dramatically reduces the manual data entry required and makes quarterly reporting far less burdensome.

Set calendar reminders. Put the quarterly deadlines in your diary now. Missing deadlines costs you penalty points, and once you hit four points, every subsequent late filing costs £200.

Separate business and personal finances. If you have not already done so, open a dedicated business bank account. This makes record-keeping far simpler and reduces the risk of missing income or double-counting expenses.

Keep receipts digitally. Use your software’s receipt capture feature or a dedicated app to photograph and store receipts. Paper receipts fade and get lost. Digital records are permanent and searchable.

Talk to your accountant. If you have professional support, make sure your accountant is prepared for MTD and discuss how responsibilities will be divided. Will they handle quarterly submissions, or will you do it yourself with their oversight?

The Bottom Line

Making Tax Digital for Income Tax is not optional if you are above the income threshold. It represents a genuine shift in how self-employed people interact with HMRC, moving from an annual reporting model to a quarterly one. The good news is that, for those who already use digital accounting software, the transition should be relatively painless. For those still relying on paper records, shoeboxes of receipts, or basic spreadsheets, the learning curve will be steeper — but entirely manageable with preparation.

The key message is simple: do not wait until April 2026 to start thinking about this. Choose your software, digitise your records, and get comfortable with the process now. Your future self — and your cash flow — will thank you.

This article was last updated on 18 February 2026. Tax rules and thresholds are subject to change. Always check GOV.UK for the latest guidance or consult a qualified tax adviser for advice specific to your circumstances.