Making Tax Digital for Income Tax: What Sole Traders Need to Know
Making Tax Digital for Income Tax has now started, but that does not mean every sole trader has suddenly acquired four extra tax returns.
From 6 April 2026, some sole traders and landlords must use compatible software to keep digital records, send quarterly updates to HMRC and submit their annual tax return.
The first quarterly update deadline is 7 August 2026.
Whether the rules apply to you depends on your qualifying income from an earlier tax return. The threshold is based on gross income before expenses, not the profit left after your business costs have been deducted.
This guide focuses mainly on sole traders, although property income can also affect whether you need to use Making Tax Digital.
Making Tax Digital at a glance
For the 2026/27 tax year:
MTD applies to sole traders and landlords with qualifying income of more than £50,000.
HMRC uses information from the 2024/25 Self Assessment tax return to assess the first group.
Qualifying income means gross self-employment and property income before expenses.
The first quarterly update is due by 7 August 2026.
Quarterly updates are summaries, not additional tax returns.
Quarterly updates do not create quarterly tax bills.
You or your accountant must sign up. HMRC does not automatically complete the sign-up for you.
Falling below the threshold for one year does not normally allow you to leave MTD.
What is Making Tax Digital for Income Tax?
Making Tax Digital for Income Tax, often shortened to MTD for Income Tax, is a new way for sole traders and landlords to keep and report their financial information.
If you are required to use it, you or your accountant will need compatible software to:
Create, store and correct digital records of business income and expenses.
Send summaries of those records to HMRC every three months.
Complete and submit your annual tax return.
HMRC does not provide its own bookkeeping package for MTD. You will need commercial software that works with the new system.
Who needs to use Making Tax Digital now?
You will generally need to use Making Tax Digital from 6 April 2026 if:
You are an individual registered for Self Assessment.
You receive income from self-employment, property or both.
Your qualifying income for 2024/25 was more than £50,000.
You are not covered by an exemption.
HMRC is writing to people it believes are affected. However, not receiving a letter does not remove your responsibility to check whether you need to sign up.
MTD is being introduced in stages:
Qualifying incomeTax return used to assess youMTD start dateMore than £50,0002024/256 April 2026More than £30,0002025/266 April 2027More than £20,0002026/276 April 2028
The wording more than is important. Qualifying income of exactly £50,000 does not exceed the threshold for the first mandatory phase.
Is the MTD threshold based on turnover or profit?
The Making Tax Digital threshold is based on your gross income before expenses, not your taxable profit.
For a sole trader, this will usually be the total sales, fees or other business income received before deducting allowable costs.
For example, suppose your business received £55,000 from customers and had £25,000 of expenses:
AmountGross business income£55,000Business expenses£25,000Profit before further tax adjustments£30,000MTD qualifying income£55,000
In this example, the qualifying income is above £50,000 even though the profit is only £30,000.
This is one of the most important points to understand. A business owner may think they are comfortably below the threshold because their profit is less than £50,000, but HMRC is looking at the income received before expenses.
What income counts towards the MTD threshold?
Qualifying income is the total gross income from:
Self-employment.
UK property.
Foreign property.
Income from separate sole-trader businesses and property businesses is generally combined when checking the threshold.
For example:
Income sourceGross incomeSole-trader business£42,000Property income£12,000Total qualifying income£54,000
Neither source exceeds £50,000 by itself, but the combined qualifying income does.
Employment income taxed through PAYE does not count towards the MTD qualifying-income threshold.
Someone earning a £35,000 salary alongside £18,000 of sole-trader income would therefore have qualifying income of £18,000 for MTD purposes, not £53,000. The employment income may still need to be included in the annual tax return, but it does not determine whether the MTD threshold has been crossed.
Does income from a side hustle count?
It can.
Where a side hustle is treated as self-employment and reported through Self Assessment, the gross income from that activity will normally form part of your qualifying income.
For example, if you run two separate sole-trader activities with gross income of £28,000 and £25,000, the combined qualifying income would be £53,000.
The businesses do not each need to exceed the threshold individually.
Once you enter MTD, separate digital records and quarterly updates are required for each separate sole-trader business.
Are there situations where the calculation is more complicated?
Yes.
You should take additional care where:
A business has started or stopped.
You have amended the tax return HMRC is using.
Your accounting period was shorter or longer than 12 months.
You receive property income.
Your tax residence is relevant.
You believe an exemption may apply.
For example, HMRC may annualise the qualifying income of a sole trader where the relevant accounting period is shorter or longer than 12 months. This means HMRC may calculate what the income would have been over a full year.
These situations are difficult to cover safely with one general example. Use HMRC’s eligibility checker or ask an accountant to review the figures rather than relying only on the headline threshold.
What is included in a quarterly update?
Every three months, your compatible software will add together the digital records for each relevant business.
The quarterly update contains totals for the income and expense categories recorded in your software.
HMRC does not receive copies of every individual invoice, receipt or bank transaction as part of the quarterly update.
You also do not need to make your final accounting or tax adjustments before sending it. Quarterly updates are summaries of the records held at that point, not completed tax returns.
Each update is cumulative.
This means the November update covers the period from the start of the tax year to the end of the second update period. It does not cover only the three months since the previous update.
You must still send an update if you did not receive income or incur expenses during the latest period.
Do I need a separate update for each business?
Yes.
If you have more than one sole-trader business, you must keep separate digital records and send separate quarterly updates for each business.
For example, someone trading separately as an electrician and a driving instructor would need:
One set of digital records for the electrical business.
One set of digital records for the driving-instructor business.
Separate quarterly updates for each business.
Self-employment and property businesses are also reported separately.
What are the MTD quarterly deadlines?
The standard quarterly update periods are:
Period coveredSubmission deadline6 April to 5 July7 August6 April to 5 October7 November6 April to 5 January7 February6 April to 5 April7 May following the end of the tax year
For people who entered MTD on 6 April 2026, the first quarterly update is due by 7 August 2026.
Businesses with an accounting period running from 1 April to 31 March should consider using calendar update periods. These run to 30 June, 30 September, 31 December and 31 March, but the submission deadlines remain the same.
Your software should show the update periods and deadlines that apply to you.
Will I have to pay tax every three months?
No.
Quarterly updates do not create quarterly Income Tax payment deadlines.
After an update has been submitted, you should be able to view an estimate of your developing tax position through your software or HMRC online account.
This is only an estimate. It may not include all your income, allowances, reliefs or final tax adjustments.
Your annual tax return and tax payment will still follow the Self Assessment timetable. The tax return and balancing payment are normally due by 31 January following the end of the tax year. Payments on account may also continue to apply under the normal rules.
MTD changes how affected businesses keep records and report information. It does not automatically change when the final tax is paid.
What does keeping digital records mean?
You must create and store records of your self-employment and property income and expenses using compatible software.
You must also continue keeping the supporting records normally required for Self Assessment, such as invoices and bank statements.
Depending on the software, records may be created by:
Importing transactions from a bank account.
Scanning invoices or receipts.
Entering transactions manually.
Importing records from a spreadsheet.
Transferring records digitally between compatible products.
A bank feed does not remove your responsibility to check the information.
Some transactions may be missing information or may not appear correctly in the feed. You remain responsible for making sure the digital records are complete and accurately categorised.
When do digital records need to start?
If your accounting period ends on 5 April, you will normally need to create digital records from 6 April of the relevant tax year.
If your accounting period runs from 1 April to 31 March, you will normally start the digital records from 1 April and use calendar update periods.
For the first group brought into MTD, the records therefore began in April 2026.
Can I continue using a spreadsheet?
Yes, provided it forms part of a compliant digital process.
A spreadsheet cannot submit the required information to HMRC by itself. You would need compatible software that can use the spreadsheet records and make the MTD submissions.
Where more than one software product is used, the records may need to be digitally linked.
HMRC gives examples of acceptable digital transfers, including linked spreadsheet cells, CSV imports and exports, and automated transfers. Manually retyping or copying and pasting records between products will not normally meet the digital-linking requirement once the record has been used in a quarterly update.
Before choosing software, check that it can:
Create or connect to digital records.
Send quarterly updates.
Support each relevant business or property income source.
Submit the annual tax return.
Do not assume that software described only as “MTD compatible” supports MTD for Income Tax. Some products may support MTD for VAT without providing all the Income Tax functions you need.
How do I register for Making Tax Digital?
HMRC calls the process signing up, rather than registering.
Making Tax Digital does not begin automatically simply because your income exceeds the threshold. You or your accountant must complete the online sign-up process.
To sign up, you must:
Be registered for Self Assessment.
Have submitted a Self Assessment tax return within the previous two years.
Confirm which tax year you will start using MTD.
Provide details of your relevant self-employment or property income sources.
You must still submit the Self Assessment tax return for the tax year before you begin using MTD.
What information will I need to sign up?
A sole trader may need to provide or confirm:
The business name used on invoices.
The business address.
The nature of the trade.
The business start date, where it falls within the previous two tax years.
The tax year from which MTD will be used.
If you have several self-employment or property income sources, you will need to check each one shown in the online service and add any that are missing.
You use the same Government Gateway user ID and password used for Self Assessment.
HMRC may also ask you to complete an identity check. This can involve using a mobile phone to match your face to an identity document or answering questions using information HMRC already holds.
What order should I do things in?
A sensible order is:
Check whether MTD applies to you.
Check whether you may be exempt.
Review your bookkeeping requirements.
Choose suitable MTD for Income Tax software.
Complete the HMRC sign-up.
Authorise the software to communicate with HMRC.
Check that the correct income sources and update periods appear.
Bring the digital records up to date.
Submit the quarterly update through the software.
Your accountant can complete the HMRC sign-up on your behalf if they are authorised to act for you.
Can I sign up voluntarily?
Yes.
You can sign up before MTD becomes compulsory for you. HMRC currently allows voluntary sign-up for the current tax year or the following tax year.
However, voluntary sign-up creates practical reporting requirements.
If you sign up during a tax year, you may need compatible software to send quarterly updates covering earlier periods in that year.
You should therefore have the bookkeeping and software arrangements ready before volunteering.
A person who is using MTD voluntarily can opt out through their HMRC online account.
Can I deregister from Making Tax Digital?
HMRC generally uses the term opt out, rather than deregister.
You cannot normally opt out simply because your income falls below the threshold for one year.
A mandatory user can opt out where:
An amendment to the relevant Self Assessment tax return reduces their qualifying income below the threshold that brought them into MTD.
Their qualifying income has remained below the relevant threshold for three consecutive years.
HMRC uses income information from the tax returns and the fourth quarterly update for the third year to determine whether the conditions have been met.
Where you are eligible, an opt-out option will appear in your HMRC online services account or your accountant’s agent services account.
The option only appears when HMRC’s records show that the conditions have been met.
What happens when I opt out?
If you opt out:
You no longer need to create MTD digital records or send quarterly updates for the relevant year.
Quarterly updates already sent for that year will be deleted.
You must still submit a Self Assessment tax return.
You should continue checking whether MTD will apply again in a future year.
You can continue using MTD voluntarily instead of opting out if you prefer.
What if I stop trading?
Stopping a business is dealt with separately from opting out because your income has fallen.
You must use your HMRC online services account, or your accountant’s agent services account, to tell HMRC the date the business stopped.
You must tell HMRC by the quarterly update deadline for the period in which the business ceased.
If one business stops but another continues
Where you have several income sources and only one stops, you must:
Tell HMRC that the relevant income source has ceased.
Complete the outstanding quarterly update covering the period in which it was active.
Continue keeping digital records and sending updates for the remaining businesses.
For example, if a business stops trading in May 2026, the final quarterly update for that business will normally be due by 7 August 2026. Further quarterly updates will not be required for the ceased business, but the income will still be included in the 2026/27 tax return.
If all your businesses and property income stop
If all your self-employment and property income sources cease, you must:
Tell HMRC the date each income source stopped.
Send the final quarterly update covering the period in which the income ceased.
Include the ceased income in the tax return for that year.
Submit that tax return using MTD for Income Tax software.
After the tax year in which all the income sources ceased, you will no longer need to use MTD. You must still retain the supporting digital records for the required period.
If all your income sources stopped after the tax return HMRC used to assess you, but before the next MTD tax year begins, you should tell HMRC before the new tax year starts. Otherwise, HMRC may still expect you to enter MTD.
Can I get an exemption?
Some exemptions are available, but the rules are detailed.
One example is digital exclusion. This can apply where it is not reasonable for someone to use compatible software because of circumstances such as:
Age.
A health condition or disability.
Religious beliefs that are incompatible with digital record keeping.
An inability to obtain internet access because of location.
HMRC considers applications according to the individual’s circumstances.
HMRC will not normally accept an application where the only reason is:
Unfamiliarity with accounting software.
Having only a small number of transactions.
The additional time or cost involved.
Having previously submitted paper tax returns.
There are other automatic and temporary exemptions covering specific circumstances and types of tax return. Anyone who thinks an exemption may apply should check the current HMRC guidance or obtain advice rather than relying on a general list.
Being exempt from MTD does not remove the requirement to submit a Self Assessment tax return where one is otherwise required.
What happens if I miss a quarterly deadline?
HMRC will not apply penalty points for late quarterly updates during the 2026/27 tax year.
However, the quarterly updates are not optional. You will still need to keep digital records and send the outstanding updates before you can submit your tax return.
The first-year relaxation only applies to quarterly-update penalties. Penalties can still apply where the annual tax return is late or the tax bill is paid after the deadline.
After 2026/27, the current published rules use a points-based system. A mandatory MTD user who reaches four late-submission points can receive a £200 penalty, followed by further penalties for additional missed deadlines while they remain at the threshold.
What should I do now?
Start by checking the self-employment and property sections of your 2024/25 Self Assessment tax return.
Look for the gross income before expenses from each relevant income source and combine the amounts.
If the total was more than £50,000:
Check whether any exemption or unusual circumstance applies.
Confirm which businesses and property income sources need to be included.
Choose software that supports MTD for Income Tax.
Complete the HMRC sign-up or ask your accountant to do it.
Authorise the software.
Make sure your digital records are complete from the correct starting date.
Prepare the first quarterly update for submission by 7 August 2026.
HMRC says people who are required to use MTD for 2026/27 should sign up now.
If your 2024/25 qualifying income was £50,000 or less, you will not enter the first mandatory phase on that figure alone. You should still check your 2025/26 qualifying income because the threshold falls to more than £30,000 from 6 April 2027.
The bottom line
Making Tax Digital is a significant change, but the first step is not buying random software or panicking about four tax returns.
The first step is checking whether the rules apply to you.
Remember:
The threshold is based on gross self-employment and property income before expenses.
Separate income sources may need to be combined.
PAYE employment income does not count towards the threshold.
Quarterly updates are not tax returns.
Quarterly updates do not create quarterly tax bills.
You or your accountant must complete the sign-up.
One year below the threshold does not normally allow a mandatory user to opt out.
Stopping a business must be reported to HMRC separately.
If MTD applies, good bookkeeping throughout the year should make the quarterly updates much more manageable.
If it does not apply yet, improving your records now can still make Self Assessment easier and help you prepare for the lower thresholds.
Hustle Mate Support members can ask a Chartered Accountant for plain-English help checking whether MTD applies, understanding their qualifying income and working out what they need to do next.
Frequently asked questions
What is Making Tax Digital for Income Tax?
Making Tax Digital for Income Tax is a system requiring affected sole traders and landlords to keep digital records, send quarterly summaries to HMRC and submit their annual tax return using compatible software.
Is the MTD threshold based on turnover or profit?
It is based on gross self-employment and property income before expenses, not taxable profit.
Does PAYE employment income count towards the MTD threshold?
No. Employment income does not count towards qualifying income for MTD. Gross self-employment and property income are used to check the threshold.
When did Making Tax Digital for Income Tax start?
The first mandatory phase started on 6 April 2026 for people with qualifying income of more than £50,000 based on their 2024/25 tax return.
When is the first MTD quarterly update due?
For people required to use MTD from April 2026, the first quarterly update is due by 7 August 2026.
Do I have to pay Income Tax every three months under MTD?
No. Quarterly updates do not create quarterly tax bills. Tax remains payable under the normal Self Assessment timetable.
Do I need to register for Making Tax Digital myself?
HMRC calls the process signing up. You or your authorised accountant can complete the sign-up. You must be registered for Self Assessment and have submitted a tax return within the previous two years.
Can I leave MTD if my turnover falls?
Not normally after only one year. A mandatory user can generally opt out following an amendment that takes the relevant qualifying income below the threshold, or once qualifying income has remained below the relevant threshold for three consecutive years.
What happens if I stop trading?
You must tell HMRC the date the business stopped and send the final quarterly update covering the active period. If all relevant income sources cease, you must still submit the tax return for that year using MTD software.
Can I continue using a spreadsheet for MTD?
Yes, but the spreadsheet must form part of a compatible digital process. You will need suitable software to connect to the records and make the required HMRC submissions.
What if I have more than one sole-trader business?
The gross income from the businesses is combined when checking the threshold. Once in MTD, you must keep separate digital records and send separate quarterly updates for each business.
What if my qualifying income was exactly £50,000?
The first mandatory threshold is income of more than £50,000. Qualifying income of exactly £50,000 does not exceed that threshold.
Important: This guide provides general information based on HMRC guidance available on 20 July 2026. It does not replace advice based on your individual tax position.
