Making Tax Digital 2026: Mandatory for Sole Traders Over £50,000 from April 2026, Quarterly Updates Plus a Year-End Tax Return

What is Making Tax Digital?

Making Tax Digital (MTD) is HMRC's programme to digitalise the UK tax system. The goal is to make tax administration more accurate and efficient by requiring businesses and individuals to keep digital records and submit tax information directly through HMRC-compatible software.

MTD for VAT launched in 2019 and is already mandatory for all VAT-registered businesses. Now HMRC is rolling out MTD for Income Tax Self Assessment (MTD ITSA), which directly affects self-employed tradespeople and landlords who currently file a Self Assessment tax return each year.

Who Is Affected and When?

MTD ITSA is being introduced in phases based on annual income thresholds:

• April 2026: Sole traders and landlords with total gross income over £50,000 in 2024-25
• April 2027: Those with income over £30,000 in 2025-26
• April 2028: Those with income over £20,000 in 2026-27
• Partnerships: Inclusion date still to be confirmed by HMRC
• Limited companies: Not affected — companies file Corporation Tax differently and are not in scope for MTD ITSA

Your income threshold is based on the gross income from self-employment and any property income combined — not profit after expenses. CIS work counts at the gross amount, before deductions.

What Changes Under MTD ITSA?

MTD ITSA turns the single annual Self Assessment return into a year-round digital process. Here is what that looks like in practice:

1. Quarterly updates: Four times a year you send HMRC cumulative totals of your income and expenses from 6 April, by category. These are not full tax calculations and no tax is paid with them — they keep HMRC informed throughout the year. You still send one if there was nothing to report, and any corrections go in your next update.
2. Year-end tax return: Your tax return (previously called the final declaration) is sent through MTD-compatible software. You confirm all your income for the year, claim any reliefs, and agree your tax bill. HMRC pre-fills PAYE, pension and CIS deduction figures. It is still due by 31 January, and payment dates (31 January and 31 July) are unchanged. The separate end-of-period statement HMRC originally planned has been scrapped.
3. Digital record keeping: You must keep digital records of all business income and expenses. Spreadsheets alone are not sufficient — you either need MTD-compatible software or bridging software that connects your spreadsheet to HMRC.

Compatible Software Options

HMRC maintains a list of recognised MTD-compatible software. Popular options for tradespeople include:

• QuickBooks Self-Employed — simple income and expense tracking with quarterly submission built in
• FreeAgent — popular with sole traders, strong invoicing and MTD filing
• Xero — more comprehensive, suits tradesmen with employees or complex accounts
• Sage — established accounting software with MTD support
• Coconut — designed for self-employed people, connects to your bank account
• 1Tap — receipt capture and record keeping app for tradesmen
• TaxScouts — combines software with accountant filing support

Most of these have mobile apps, which means you can log jobs and expenses on site. Costs typically range from £10 to £30 per month. If you currently use spreadsheets and want to continue doing so, bridging software (such as Absolute or Coconut) can connect your spreadsheet to HMRC's systems at lower cost.

What Records You Need to Keep

Under MTD you must keep digital records of the following, updated throughout the year:

• All sales income, recorded invoice by invoice (not just totals)
• All business purchases with dates and amounts
• Expenses broken down by category (materials, fuel, tools, subcontractors, etc.)
• Mileage records for business travel
• Capital assets — tools, vans, and equipment used for the business

Quarterly Reporting Calendar

The quarterly submission deadlines follow the UK tax year (6 April to 5 April):

Penalties for Non-Compliance

HMRC is using a points-based penalty system for MTD ITSA late submissions:

• Each late quarterly update or tax return earns 1 penalty point
• When you reach 4 points, a £200 penalty is charged, then £200 for each further missed deadline
• People who joined in April 2026 get no points for late quarterly updates in 2026-27. The Budget on 28 October 2026 announced the same for people joining in April 2027: no points for late quarterly updates in 2027-28 (the legislation is still to be passed). You must still send all your updates before your tax return, and late tax returns still earn points
• From April 2027 the points-based penalties apply to everyone who files a Self Assessment return, not only people using MTD
• Below 4 points, each point expires 24 months after the missed deadline; at 4 points, they are cleared after 12 months of on-time submissions (GOV.UK)

This system is designed to be lenient for occasional mistakes but escalates for repeated late filing. Late payment is penalised separately: from April 2027, 4% of the tax unpaid at day 15, another 4% at day 30, then 10% a year, plus interest.

Action Plan: What to Do Now

1. Check your income threshold. Add up your gross self-employment income (and any rental income) to confirm whether you fall within the April 2026 or later cohort.
2. Choose your software. Research the options above and pick one that fits how you work. Many offer free trials.
3. Start using it now. Do not wait until your mandatory start date. Building the habit of logging income and expenses digitally takes time, and starting early means no scramble later.
4. Talk to your accountant. Discuss how your quarterly workflow will change. If you do not have an accountant, consider getting one — MTD increases the frequency of contact and a good accountant will save you more than their fee.
5. Do not wait until April.HMRC's systems, software integrations, and accountant availability will all be under pressure as deadlines approach.

Frequently Asked Questions