Making Tax Digital for Income Tax: What Sole Traders Need to Know

Making Tax Digital (MTD) already applies to VAT-registered businesses, requiring digital records and software-based filing instead of manual returns. It’s now extending to Income Tax Self Assessment for sole traders and landlords, on a phased timeline based on income. Here’s what that actually means if you’re a sole trader.

What’s actually changing

Instead of filing one Self Assessment return a year, businesses within scope of MTD for Income Tax will need to keep digital records throughout the year and send quarterly updates to HMRC, with a final declaration after the tax year ends. It’s a significant change in rhythm from the current once-a-year process, not just a different form – four updates a year instead of one means record-keeping has to be a routine, not an annual event.

When it applies to you: phased by income

HMRC has published a phased rollout based on qualifying income:

• From April 2026: sole traders and landlords with qualifying income above £50,000
• From April 2027: qualifying income above £30,000
• From April 2028: qualifying income above £20,000

[These dates and thresholds subject to change – they are the figures published at the time of writing, but HMRC has adjusted MTD timelines before]

“Qualifying income” isn’t the same as profit

The thresholds are based on gross income from self-employment and property, before expenses are deducted – not your taxable profit. A business with a healthy turnover but modest profit margin could still be well within scope even if the actual tax bill is relatively small. If you have both self-employment and rental income, both generally count toward the same threshold, so it’s worth checking your combined position rather than looking at either income source in isolation.

What you’ll need in place before your threshold date

• MTD-compatible software for digital record-keeping – spreadsheets alone generally won’t meet the requirement without a compatible bridging tool
• A routine for keeping records current throughout the year, since quarterly updates don’t work if records are months behind
• An understanding of what counts as a “quarterly update” versus the year-end final declaration

Landlords are in scope too, not just the self-employed

Despite the name, MTD for Income Tax isn’t only about self-employment – it applies to qualifying property income as well, on the same thresholds and timeline. If you’re a landlord rather than, or in addition to, running a self-employed business, the same preparation applies: digital records, compatible software, and quarterly updates once your qualifying income crosses the relevant threshold for your cohort.

If you’re already VAT-registered, this is less of a leap

If your business is already VAT-registered and compliant with MTD for VAT, you’re already keeping digital records and using compatible software – the extension to Income Tax builds on that existing habit rather than starting from nothing. The adjustment is mainly about frequency (quarterly updates specifically for Income Tax) rather than an entirely new way of working.

What happens if you don’t comply

As with any HMRC filing obligation, there are penalties for failing to keep digital records or file on time once you’re within scope. The sensible approach is the same one that avoids most tax penalties generally: get set up properly before your deadline arrives rather than finding out the requirements after you’ve already missed one.

Your year-end Self Assessment return doesn’t disappear

MTD for Income Tax adds quarterly updates on top of the existing system – it doesn’t replace the need for an accurate year-end position. The final declaration after the tax year ends still pulls everything together, in much the same spirit as the current Self Assessment return does now. Think of the quarterly updates as more frequent check-ins building toward the same year-end outcome, rather than four entirely separate filings.

This doesn’t need to be a last-minute scramble

The sensible approach is the same one that makes any bookkeeping easier: get digital records and a proper routine in place well before your threshold date arrives, rather than treating it as a looming deadline to panic about. If you’re already using cloud accounting software for regular bookkeeping, you’re most of the way there already – see our Bookkeeping page.

If you’re not sure whether or when this applies to you

Between the income-based thresholds and the phased dates, it’s easy to be unsure exactly when MTD for Income Tax will apply to your specific situation. This is a straightforward thing to check – better to ask now than find out at the point it becomes urgent.