Making Tax Digital for Income Tax: What Sole Traders Need to Know in 2025-26
Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is HMRC's biggest shake-up of self-assessment in decades. From April 2026, sole traders and landlords with annual income above £50,000 must keep digital records and submit quarterly updates to HMRC via MTD-compatible software. Those earning above £30,000 follow in April 2027. If you currently file a paper or online Self Assessment return, this changes how you report your income — permanently.
Who is affected and when?
- April 2026: Self-employed individuals and landlords with combined business/property income exceeding £50,000 per year.
- April 2027: Those with income above £30,000.
- April 2028 (proposed): Those with income above £20,000 — subject to further government review.
- Partnerships: Not included in current phases — a later rollout is planned but no firm date yet.
- Trusts, estates, and non-resident landlords: Also excluded from the current mandate.
Income from employment does not count towards the threshold — only self-employment profits and property rental income. Someone earning £45,000 from a job and £8,000 from a side business is not affected in April 2026 (total business income is only £8,000).
What changes under MTD for ITSA?
Under the current system, you file one Self Assessment return after the tax year ends. Under MTD for ITSA:
- Quarterly updates: You submit a summary of income and expenses to HMRC every quarter (by 7 August, 7 November, 7 February, and 7 May).
- End of period statement (EOPS): An annual finalisation of your figures, replacing the current SA return for business income.
- Final declaration: Combines all income sources (including PAYE, dividends, etc.) — replaces the overall Self Assessment return.
Quarterly submissions are updates, not tax payments. Your tax liability is still calculated at year end. However, HMRC will show you a running estimate of your likely bill throughout the year, which can help with cash flow planning.
What software do you need?
You must use HMRC-approved MTD-compatible software. You cannot use HMRC's own online portal for MTD submissions. HMRC maintains a list of approved products at gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-income-tax. Popular options include:
- QuickBooks Self-Employed / QuickBooks Online: Good for sole traders, bank feed integration, MTD-ready.
- FreeAgent: Popular with freelancers and contractors, owned by NatWest Group.
- Xero: Strong accounting features, widely used by small businesses.
- Sage Accounting: Enterprise-heritage but now has a small business tier.
- Spreadsheet bridging software: If you want to keep using a spreadsheet (Excel/Google Sheets), bridging software sends the data to HMRC in the required digital format. This is permitted but requires a separate tool.
HMRC's MTD pilot — can you join early?
HMRC has been running a voluntary pilot since 2018. For the 2025-26 tax year, the pilot is open to a wider group of sole traders and landlords. Joining early lets you test the software and process before it becomes mandatory. You can sign up via HMRC's online service if you meet the eligibility criteria (single trade or single property, UK resident, not in a partnership).
Key dates to remember
| Deadline | What to submit |
|---|---|
| 7 August | Quarter 1 update (6 April – 5 July) |
| 7 November | Quarter 2 update (6 July – 5 October) |
| 7 February | Quarter 3 update (6 October – 5 January) |
| 7 May | Quarter 4 update (6 January – 5 April) |
| 31 January | Final declaration (same as current SA deadline) |
Penalties for non-compliance
HMRC is introducing a points-based penalty system for MTD. Each missed quarterly submission earns a penalty point. Once you reach a threshold (four points for quarterly filers), a £200 fine is triggered. Points reset after a period of full compliance. This replaces the current fixed £100 late-filing penalty for Self Assessment.
Exemptions from MTD for ITSA
HMRC will grant exemptions where MTD is not reasonably practicable. Grounds include:
- Age, disability, or remoteness making digital access unreasonable.
- Religious objections to using computers.
- Insolvency or certain other circumstances.
You must apply to HMRC for an exemption — it is not automatic. HMRC will assess each case individually.
Frequently asked questions
Can I still keep paper records?
Not if you are mandated. MTD for ITSA requires your records to be kept and submitted digitally. You can still make notes on paper for your own reference, but the records entered into your MTD software must be digital from source. Typing figures from paper invoices into software counts as digital — you do not need to scan every receipt.
Can I use a spreadsheet?
Yes, but only with bridging software. A plain Excel or Google Sheets file cannot connect directly to HMRC. You need a bridging tool that reads your spreadsheet and submits the data in MTD format. Several low-cost bridging tools are HMRC-approved. This is the lowest-cost route for those who prefer spreadsheets.
Will my accountant handle this for me?
Yes, if you use an accountant or bookkeeper, they can be authorised to submit MTD updates on your behalf. However, you will still need to provide them with digital records throughout the year — the quarterly deadline means you cannot hand over a box of receipts once a year. Discuss your workflow with your accountant well before April 2026.