Making Tax Digital for Income Tax: what sole traders need to know

What is Making Tax Digital for Income Tax?

Making Tax Digital (MTD) for Income Tax is HMRC's new way for sole traders and landlords to report their income. Instead of doing everything once a year in a single tax return, you:

1. keep digital records of your business income and expenses in MTD-compatible software;
2. send a quarterly update to HMRC from that software, four times a year; and
3. submit your tax return through the software by 31 January after the tax year, as now.

Quarterly updates are summaries of income and costs. They don't mean paying tax four times a year: you still pay by 31 January (and 31 July, if you make payments on account).

Who has to use it, and when

It depends on your qualifying income in an earlier tax year:

HMRC uses your tax return for each year to decide and writes to people it thinks need to join. It's still your responsibility to check.

What counts as qualifying income

Qualifying income is your total turnover before expenses from:

• self-employment (all your sole trader businesses added together); and
• property (UK and overseas rental income — your share if you own jointly).

It doesn't include wages from a PAYE job, pensions, dividends, savings interest, or your share of profits from a partnership.

That "before expenses" part catches lots of tradespeople out.

Worked example

Ricky is a self-employed roofer in CIS. In 2025/26 his contractors paid him £36,000 gross, including £4,000 for materials. CIS of £6,400 was taken off. He spent £9,000 on his van, tools and other costs.

• Qualifying income: £36,000 — his gross turnover. Not £29,600 (what he received after CIS) and not £23,000 (his profit after materials and costs).
• £36,000 is over £30,000, so Ricky must use MTD for Income Tax from 6 April 2027.

If Ricky also rented out a flat for £8,000 a year, that would be added on too.

Quarterly update deadlines

With the standard quarters, the deadlines are:

You can ask to use calendar quarters (ending 30 June, 30 September and so on) if that suits your bookkeeping. Each update is cumulative — it covers the year so far.

A timeline for someone starting in April 2027

• By 31 January 2027: file your 2025/26 return the usual way.
• Before 6 April 2027: sign up for MTD for Income Tax and set up compatible software.
• From 6 April 2027: keep digital records of every sale and cost.
• 7 August, 7 November 2027, 7 February and 7 May 2028: quarterly updates.
• By 31 January 2028: file your 2026/27 return the old way — the last one.
• By 31 January 2029: submit your 2027/28 return through your MTD software and pay any tax.

Software

You'll need software HMRC recognises for MTD for Income Tax. Options include:

• Accounting software that handles invoices, expenses and bank feeds and sends the updates.
• Bridging software that takes figures from your own spreadsheet and sends them.
• App-based tools from some business bank accounts.

HMRC lists recognised software on GOV.UK. Some options are free, at least for simple businesses; most charge a monthly fee. Check it handles CIS deductions and, if you have rental income, property too.

Penalties

MTD comes with a new points-based penalty system for late submissions:

• Late quarterly updates: each one can earn a penalty point. At 4 points you get a £200 penalty, and another £200 for each late submission after that while you're at the threshold. HMRC has said it won't give points for late quarterly updates in the 2026/27 tax year.
• Late payment: 3% of the tax unpaid at day 15, another 3% of what's still unpaid at day 30, then 10% a year on the balance. In the first year, HMRC will waive the day-15 penalty if you pay or set up a payment plan within 30 days.

These replace the old £100-plus-daily-penalties system for people in MTD. The government has announced that the new penalties will apply to all Self Assessment taxpayers from 2027/28.

Exemptions

• Automatic: if your qualifying income is £20,000 or less, you don't have to use MTD.
• Digital exclusion: you can apply for an exemption if it's not reasonable for you to use digital tools, for example because of age, disability, where you live (no reliable internet) or religious beliefs.
• Some groups are exempt automatically, such as people without a National Insurance number. GOV.UK lists the others.

You need to apply for a digital exclusion exemption; it isn't given automatically.

Can I leave once I've joined?

Once you're in, you stay in while your qualifying income is over the threshold. You can only choose to leave if your qualifying income is below the threshold for three tax years in a row.

How to get ready

1. Use the MTD checker to find your start date.
2. Start keeping records digitally now — photos of receipts, a simple spreadsheet or an app.
3. Choose software in good time and get used to it before your first quarter.
4. If you use an accountant, ask how they'll handle MTD and whether their fees will change.
5. Keep your CIS records in order: you'll be reporting gross pay and CIS deductions throughout the year.