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

Making Tax Digital for Income Tax Self Assessment (MTD ITSA) is the biggest change to the UK tax system in a generation. From April 2026, sole traders and landlords earning over £50,000 will be required to keep digital records and submit quarterly updates to HMRC using compatible software.

If you are self-employed, this guide covers everything you need to know — who must comply, what you need to do, and how to get ready before the deadline.

What Is Making Tax Digital for Income Tax?

Making Tax Digital (MTD) is HMRC's programme to modernise the UK tax system. Rather than filing a single Self Assessment tax return once a year, affected taxpayers must:

• Keep digital records of their income and expenses throughout the year
• Submit quarterly updates to HMRC summarising their business transactions
• File a final declaration at the end of the tax year, replacing the traditional Self Assessment return

The aim is to reduce errors, close the tax gap, and give taxpayers a clearer picture of their tax position throughout the year. HMRC estimates that errors on tax returns cost the Exchequer billions annually, and digital record keeping is expected to significantly reduce this.

Who Must Comply and When?

MTD ITSA is being rolled out in phases based on your gross income from self-employment or property:

April 2026: Sole traders and landlords with gross income over £50,000 must comply. This is your total business turnover before expenses, not your profit.

April 2027: The threshold drops to £30,000, bringing a much larger group into scope.

Under review: HMRC has indicated that the threshold may eventually drop further, potentially to £20,000 or lower, but no firm date has been confirmed.

If you have multiple sources of self-employment and property income, you add them together to determine whether you exceed the threshold. For example, if you earn £35,000 from freelance work and £20,000 from rental income, your combined gross income is £55,000 and you must comply from April 2026.

What Counts as Gross Income?

This is a common source of confusion. Gross income means your total turnover — everything your business receives before deducting any expenses. It is not your profit.

If your business turns over £55,000 but your expenses are £20,000, your profit is £35,000 — but your gross income is still £55,000, which puts you above the £50,000 threshold.

The figure HMRC uses is the total of boxes 15 to 20 on your Self Assessment tax return (the turnover figures for self-employment and property income).

Quarterly Updates: What You Submit

Under MTD ITSA, the tax year (6 April to 5 April) is divided into four quarters:

| 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 is a summary of your income and expenses for that period. You do not need to submit individual receipts or invoices — just the totals by category.

Your MTD-compatible software sends this information directly to HMRC through their API. If you are using Accounted, this happens automatically based on the transactions in your account.

The Final Declaration

After the end of the tax year, you must submit a final declaration. This replaces the Self Assessment tax return and is due by 31 January following the end of the tax year.

The final declaration confirms your total income and expenses for the year, includes any adjustments (such as capital allowances or losses brought forward), and calculates your tax liability. It is essentially the same information that would have been on your Self Assessment return, but submitted through MTD-compatible software.

Digital Record Keeping Requirements

MTD requires you to keep digital records of all your business transactions. This means using software — not paper records or manual spreadsheets with no digital links.

The records you must keep digitally include:

• Income: Every sale, fee, or other business receipt, with the date, amount, and category
• Expenses: Every business purchase or cost, with the date, amount, and category
• Supporting information: VAT registration number (if applicable), business name and address

You do not need to scan and store every receipt digitally, although it is good practice. What HMRC requires is that the transaction data — amounts, dates, and categories — is held in compatible software.

Spreadsheets can still be used, but only if they have a digital link to MTD-compatible software that submits the data to HMRC. You cannot simply type figures into HMRC's online portal.

What Software Do You Need?

You need software that is officially recognised by HMRC as MTD-compatible for Income Tax. HMRC maintains a list of compatible software on GOV.UK.

When choosing software, consider:

• Automatic bank feeds — software that connects to your bank account and imports transactions automatically saves significant time and reduces errors
• AI categorisation — modern software like Accounted uses artificial intelligence to categorise your expenses, so you spend less time on data entry
• Quarterly submission — the software should handle quarterly updates automatically, not require you to manually prepare and submit them
• Receipt capture — the ability to photograph receipts via your phone or WhatsApp makes record keeping effortless
• Tax estimates — good MTD software shows you an estimated tax bill throughout the year, so there are no surprises in January

Accounted is designed specifically for UK sole traders navigating MTD. It connects to your bank, categorises transactions using AI, submits quarterly updates automatically, and gives you real-time tax estimates.

How to Sign Up for MTD ITSA

You sign up for MTD ITSA through your Government Gateway account on GOV.UK. The process involves:

1. Check your eligibility — confirm your gross income exceeds the threshold
2. Choose compatible software — select and set up your MTD software before signing up
3. Sign up on GOV.UK — use the MTD sign-up service, linking your software to your HMRC account
4. Authorise your software — grant your software permission to submit on your behalf
5. Start keeping digital records — from the start of the tax year you sign up for

If you have an accountant or tax agent, they can sign you up and manage submissions on your behalf.

Cash Basis vs Traditional Accounting

MTD does not change your choice of accounting method. You can still use:

• Cash basis — record income when you receive it and expenses when you pay them. This is simpler and suitable for most sole traders with turnover under £150,000.
• Traditional (accruals) basis — record income when you earn it and expenses when you incur them, regardless of when money changes hands.

Most sole traders use cash basis, and MTD software handles both methods. If you are unsure which to use, cash basis is the default for sole traders and is usually the right choice unless your accountant advises otherwise.

Penalties for Non-Compliance

HMRC is introducing a new points-based penalty system alongside MTD:

• Each late quarterly submission earns you a penalty point
• Once you reach the threshold (4 points for quarterly obligations), you receive a £200 penalty for each subsequent late submission
• Points expire after a period of compliance
• Late payment penalties are separate: interest is charged from day one, with a 2% penalty after 15 days late and further penalties at 30 days and 6 months

The penalty system is designed to be proportionate — occasional lateness will not result in immediate fines, but persistent non-compliance will add up quickly.

Common Concerns and Misconceptions

"I already do Self Assessment — isn't that enough?" No. MTD ITSA replaces the annual Self Assessment return with quarterly updates plus a final declaration. The information is similar, but the frequency and method of submission are different.

"Can my accountant handle everything?" Your accountant can manage your MTD submissions, but the underlying records must be kept digitally throughout the year. You cannot hand over a carrier bag of receipts in January and expect your accountant to sort it out.

"I only use spreadsheets — do I need new software?" Spreadsheets alone are not sufficient. You need either dedicated MTD software or a digital link from your spreadsheet to compatible software.

"What about my property income?" Property income is included in MTD ITSA. If your combined self-employment and property income exceeds the threshold, all of it must be reported through MTD.

"I earn just under £50,000 — am I safe?" For now, yes. But the threshold drops to £30,000 in April 2027, and may go lower. Getting set up early means you are prepared whenever the threshold catches you.

How to Prepare Now

Even if the deadline feels distant, preparing early is sensible:

1. Check your gross income — review your last Self Assessment to see where you stand against the threshold
2. Choose software — sign up for MTD-compatible software and start using it now, so you are comfortable before the deadline
3. Connect your bank — set up automatic bank feeds to reduce manual data entry
4. Categorise as you go — get into the habit of reviewing and categorising transactions weekly rather than leaving it all to the end of the quarter
5. Talk to your accountant — if you use an accountant, discuss how MTD will change your working relationship and who will handle submissions

What Accounted Does for You

Accounted is built from the ground up for MTD ITSA. Here is how it simplifies the process:

• Bank feeds — connects to all major UK banks and imports transactions automatically
• AI categorisation — Penny, our AI bookkeeper, categorises your expenses with over 95% accuracy
• Quarterly submissions — submits your quarterly updates to HMRC automatically when they are due
• Receipt capture — snap a photo via WhatsApp and Penny matches it to the right transaction
• Real-time tax estimates — see your estimated tax bill at any point during the year
• Final declaration — prepares and submits your year-end final declaration

You do not need to understand the technical details of MTD. Accounted handles it all in the background while you focus on running your business.

Stop dreading your Self Assessment. Accounted tracks everything throughout the year so January is just a click, not a crisis. Try it free.