Making Tax Digital for income tax — what sole traders must do before April 2026
Estimated reading time: 8 minutes
Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA) represents the most significant change to the UK tax reporting system in decades. Starting April 2026, the way you report your income as a sole trader is changing forever. If your qualifying income exceeds £50,000, you cannot afford to ignore this deadline. While some extensions have been announced, the 6 April 2026 start date is now firmly set for the first wave of mandated sole traders. Penalties for non-compliance will eventually apply, so understanding the requirements now is essential to avoid unnecessary costs and stress.
This guide cuts through the confusion to explain exactly what MTD for ITSA means, who is affected, what you need to submit, and—most importantly—what you must do to get your business ready.
What MTD for ITSA Actually Means
Making Tax Digital is HMRC’s flagship initiative to modernise the UK tax system. The government’s core goal is to reduce tax errors, improve record-keeping, and create a more efficient, real-time tax system for both businesses and HMRC. Since its introduction, MTD has been mandatory for all VAT-registered businesses, requiring them to keep digital records and submit VAT returns using compatible software.
From April 2026, HMRC is expanding MTD to cover Income Tax Self-Assessment. In simple terms, MTD for ITSA means moving away from the traditional annual Self Assessment tax return for your self-employment and property income. Instead of filing one return each year, you will be required to:
- Keep digital records of all your business income and expenses.
- Use HMRC-compatible software (approved accounting or bridging software) to manage your records and make submissions.
- Submit quarterly summaries of your income and expenses to HMRC throughout the tax year.
- File a final declaration at the end of the year to confirm your income and submit any additional information (e.g., bank interest, dividends, capital gains).
The move to an online, quarterly system is designed to help businesses stay on top of their tax affairs in real time, reducing the likelihood of end-of-year cash flow surprises and helping to minimise errors.
Who Must Comply and By When
The rollout of MTD for ITSA is happening in phases, based on your total qualifying income. Understanding which phase applies to you is your first step.
HMRC will look at your 2024/25 Self Assessment tax return to determine your qualifying income and whether you fall into the first wave of mandatory compliance.
MTD ITSA Mandatory Thresholds
- From 6 April 2026: Sole traders and landlords with a total gross qualifying income over £50,000 from self-employment and/or property must comply with MTD for ITSA. This first phase is expected to bring around 780,000 taxpayers into the new system.
- From 6 April 2027: The threshold lowers to £30,000, meaning a further 970,000 individuals will need to join.
- From April 2028: The government has set out plans to lower the qualifying income threshold further to £20,000.
⚠️ Important Note for Partnerships: While this article focuses on sole traders, general business partnerships will also need to use MTD for ITSA from April 2027, with limited partnerships and LLPs following from April 2028.
If your income falls below the current thresholds, you can choose to voluntarily sign up to MTD for ITSA at any time. However, you are not mandated to do so until your qualifying income exceeds the relevant threshold.
Quarterly Reporting — What to Submit
Once you are within the scope of MTD for ITSA, the annual Self Assessment return is replaced by a new, four-step digital process. HMRC will require you to submit four quarterly updates and one final declaration each tax year.
Quarterly Updates
Your MTD-compatible software will generate simple summaries of your business income and expenses for each quarter. These quarterly updates must be submitted to HMRC within one month of the end of each quarter. The key deadlines for the 2026/27 tax year are as follows:
| Quarter | Period Covered | Submission Deadline |
|---|---|---|
| Quarter 1 | 6 April – 5 July 2026 | By 5 August 2026 |
| Quarter 2 | 6 April – 5 October 2026 | By 5 November 2026 |
| Quarter 3 | 6 April – 5 January 2027 | By 5 February 2027 |
| Quarter 4 | 6 April – 5 April 2027 | By 5 May 2027 |
What information is required? Each quarterly update is cumulative, meaning each update includes the year-to-date totals. You will need to submit:
- Total income for the year to date.
- A breakdown of business expenses across approximately 16 categories.
If your combined annual income is under £90,000, you have the option to submit consolidated expense totals rather than a detailed breakdown, simplifying the process for smaller businesses.
Final Declaration
After you have submitted your four quarterly updates, you must complete the tax year by submitting a Final Declaration. This replaces your old Self Assessment return. The Final Declaration requires you to:
- Enter any additional income not captured in your quarterly updates (e.g., bank interest, dividends, employment income, capital gains).
- Review the tax calculation generated by HMRC based on all the information submitted.
- Confirm that all income for the tax year has been declared.
Approved Software Options Compared
Using HMRC-compatible software is not optional; it is the cornerstone of MTD compliance. You cannot simply log into your HMRC online account and manually enter your figures. You have two main types of software to choose from:
1. Full Accounting Software
Full accounting software provides a complete digital record-keeping system, with automatic bank feeds, invoicing, expense tracking, and direct submission to HMRC. This is generally the simpler, safer, and more efficient long-term choice for most sole traders. Popular HMRC-approved options include:
- QuickBooks Online: An industry leader with excellent MTD support, intuitive invoicing, and in-product prompts to guide you through MTD tasks.
- Xero: A highly popular cloud-based platform with a simple user interface and strong real-time collaboration features.
- FreeAgent: Now owned by NatWest, FreeAgent is particularly accessible for sole traders and landlords, with an intuitive dashboard and automated bank categorisation.
- Sage Accounting: A long-established powerhouse with robust reporting tools and a clean interface, ideal for businesses with more complex needs.
- QuickFile: A fully-featured, free-option MTD Income Tax solution that is listed on HMRC’s official software choices page.
2. Bridging Software
If you are deeply attached to your Excel spreadsheets and want to minimise disruption, bridging software is your solution. Bridging software acts as a connector between your existing spreadsheet records and HMRC’s systems. It imports your quarterly income and expense totals from your spreadsheet and submits them to HMRC in a compliant format.
HMRC explicitly permits this approach, stating that “if you use spreadsheets to record income and expenses, bridging software can connect to them and make your submissions to HMRC”. However, bridging software has limitations. It lacks the automatic validation, deadline notifications, and automated categorisation of full accounting software, placing more responsibility on you to ensure accuracy and timeliness.
Penalties for Non-Compliance
HMRC is introducing a new, points-based penalty system for MTD for ITSA, although with some important transitional easements.
Late Submission Penalties (Points-Based System)
For Income Tax, once you are within MTD, late submissions attract penalty points. You will receive a point for each late submission. Once you accumulate two penalty points, you will be charged a £200 fine, and a further £200 penalty will be charged for every subsequent late submission. Your points will reset to zero if you make all submissions on time for a period of 24 months.
However, in a significant concession announced in the Autumn Budget 2025, late submission penalties will NOT apply for quarterly updates during the 2026/27 tax year. This is a one-year transitional easement to help taxpayers and agents adjust to the new quarterly filing regime. Crucially, this relaxation does not apply to the end-of-year tax return (Final Declaration) for 2026/27, which remains subject to the points-based penalty system.
Late Payment Penalties
Late payment penalties are separate and operate on a percentage-based structure:
- Within 15 days of the deadline: No penalty, but interest will still apply.
- 16-30 days late: A penalty of 3% of the outstanding tax bill.
- More than 31 days late: An additional penalty of 3% (total 6%), plus daily interest.
For the first year in the new system, all taxpayers will have an additional 15 days (giving 30 days in total) to pay any outstanding tax before a late payment penalty is issued.
Other Penalties
HMRC can also issue penalties for failing to maintain digital records and for inaccurate reporting. Inaccuracy penalties range from 0% to 100% of the lost revenue, depending on whether the error was careless, deliberate, or deliberately concealed.
How to Transition from Spreadsheets
If you currently rely on manual records or spreadsheets, the move to MTD can feel daunting. However, a smooth transition is achievable with a structured approach.
Step 1: Check Your Eligibility
First, confirm your mandatory start date. Review your 2024/25 qualifying income. If it exceeds £50,000, you must be ready for April 2026.
Step 2: Choose Your Software
Decide between full accounting software and bridging software. If your affairs are simple and you want to keep using Excel, bridging software is a valid, compliant option. However, for most sole traders, full accounting software will save significant time and reduce the risk of errors in the long run.
Step 3: Digitise Your Records
Start moving your record-keeping to a digital format now. Practise using your chosen software by inputting your current year’s income and expenses. This will help you identify any issues well before the mandatory start date.
Step 4: Set Up Digital Links
If using a spreadsheet with bridging software, ensure you establish a compliant digital link. HMRC expects all data to move electronically through approved digital links. You cannot copy and paste figures or manually type them into the bridging software. The link must be automated.
Step 5: Seek Professional Advice
If you are unsure about any aspect of MTD, or if your tax affairs are complex, speak to an accountant or tax advisor. At Acumen AGC, we can guide you through the entire process, from software selection to ensuring your first quarterly submission is accurate and on time.
FAQ
Q: I earn less than £50,000. Do I need to do anything?
A: Not yet, unless you want to sign up voluntarily. However, with the threshold dropping to £30,000 in April 2027 and £20,000 the following year, it is wise to familiarise yourself with the requirements and start moving to digital record-keeping now.
Q: Can I still use an accountant?
A: Yes, absolutely. In fact, using an accountant is highly recommended. Your accountant can act as your agent, using their own MTD-compatible software to manage your quarterly submissions and final declaration on your behalf. This can significantly reduce your administrative burden.
Q: Will Self Assessment disappear completely?
A: For income from self-employment and property, yes, the traditional annual Self Assessment return will be replaced by the quarterly updates and final declaration. However, you may still need to submit a Self Assessment return for other income sources, such as untaxed interest or dividends, until those are fully integrated into the MTD system.
Q: What if my income fluctuates and drops below the threshold in future years?
A: If your qualifying income falls below the threshold for a sustained period, you can apply to opt out of MTD. You should notify HMRC via your compatible software. If you do not opt out, you will remain within the MTD system.
Q: Are there any exemptions?
A: Yes. HMRC has confirmed permanent exemptions for taxpayers who have a Power of Attorney, are under a deputyship appointed by the Court of Protection, or are otherwise digitally excluded (e.g., for reasons of age, disability, or location). Certain small groups, including recipients of trust income and those using averaging relief (e.g., farmers), have received a one-year deferral to April 2027.
Next Steps with Acumen AGC
The transition to Making Tax Digital for Income Tax is not just a compliance burden; it is an opportunity to modernise your financial processes, gain real-time visibility of your tax position, and reduce the risk of end-of-year surprises.
At Acumen AGC, we specialise in helping sole traders navigate complex tax changes with confidence. Our team can:
- Assess your specific situation and confirm your MTD start date.
- Help you choose and set up the most suitable HMRC-approved software for your business.
- Act as your agent, managing all quarterly submissions and your final declaration on your behalf.
- Provide ongoing support and advice to keep you fully compliant and penalty-free.
Don’t leave your compliance to chance. Contact Acumen AGC today to discuss how we can make your transition to Making Tax Digital seamless and stress-free.
