Making Tax Digital for Sole Traders: What You Actually Need to Do

Check whether you're affected

MTD for Income Tax applies to sole traders and individual landlords - not limited companies and not partnerships (yet). If you complete the self-employment pages of your Self Assessment return, HMRC treats you as a sole trader for MTD purposes. GOV.UK

Whether you're in scope depends on your qualifying income - total gross income from self-employment and property combined, before expenses. Only self-employment and property income counts.

Turnover, not profit - the bit that catches people out

The single most common misunderstanding. The threshold is based on gross income - total turnover before expenses, capital allowances, or losses. Not taxable profit. GOV.UK

If you're close to a threshold, check your gross figures carefully. HMRC uses qualifying income from your most recently filed tax return. GOV.UK

What "keeping digital records" actually means

Simpler than it sounds. HMRC requires a digital record of each transaction. Three things: date, amount, category. GOV.UK

You don't need to photograph receipts, scan invoices, or connect your bank account. You need a record of what came in and what went out, stored digitally.

A spreadsheet with date, description, category, and amount meets the requirement - provided it's digitally linked to your submission software. You don't need digital copies of receipts or invoices - just the information recorded digitally. GOV.UK

Digital record-keeping replaces your existing record-keeping obligation - it's not an extra task on top of what you already do.

Spreadsheet myths - busted

There's widespread misunderstanding about what tools you need. HMRC explicitly supports spreadsheets with bridging software. GOV.UK

If you have a simple business with straightforward income and expenses, a spreadsheet with bridging software is likely all you need. If your business is more complex - multiple income streams, stock, VAT - full accounting software may save you time. But the choice is yours.

You'll need to sign up for Making Tax Digital through GOV.UK. This is a separate registration from Self Assessment - even if you already file a tax return, you need to sign up for MTD specifically. GOV.UK

You'll need your Government Gateway credentials (the same ones you use for Self Assessment). If you have an accountant or tax agent, they can register on your behalf.

You need HMRC-compatible software to submit your quarterly updates and Final Declaration. You have two main options:

HMRC maintains a list of compatible software at gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-income-tax.

From 6 April 2026, start recording each business transaction digitally. For each transaction, you need three things: the date, the amount, and the category.

Categories mirror the headings on the SA103 (self-employment supplementary pages) - things like sales/turnover, cost of goods sold, travel, advertising, phone and internet. Your software or template will usually list these for you.

You're required to keep records for at least 5 years after the 31 January filing deadline for the relevant tax year. This is the same as the existing Self Assessment requirement.

Expenses and simplified expenses explained

The rules for what you can claim haven't changed - MTD uses the same expense categories as Self Assessment. If you could claim it before, you can claim it now.

HMRC offers simplified expenses for certain costs. These use flat rates instead of actual costs, which means less record-keeping:

• Vehicle costs: 45p per mile for the first 10,000 business miles, then 25p per mile after that. No need to track fuel, insurance, or servicing separately.
• Working from home: Flat monthly rates based on hours worked from home:
  • 25-50 hours per month: £10
  • 51-100 hours per month: £18
  • 101+ hours per month: £26

Common business expenses you can claim include: office supplies, phone and internet (business proportion), professional subscriptions, advertising and marketing, travel and subsistence, insurance, training directly related to your business, and accountancy fees.

Four times a year, you'll submit a summary of your income and expenses to HMRC through your software. These are cumulative - each update includes all transactions from the start of the tax year, not just the latest quarter. Each update replaces the previous one. GOV.UK

After the end of the tax year, you submit a Final Declaration through your software. This replaces the Self Assessment tax return. The deadline is 31 January following the end of the tax year - the same deadline you're used to.

The Final Declaration is where you make any year-end adjustments, add other income sources (employment, dividends, savings interest), and confirm everything is correct. All four quarterly updates must be submitted before you can file your Final Declaration.

Key dates at a glance

Decisions you'll need to make

MTD doesn't require you to change how you run your business - but there are a few choices worth thinking about:

Penalties - and why year one is forgiving

MTD uses a points-based penalty system for late submissions. Each late quarterly update or Final Declaration adds one penalty point. Once you reach 4 points, you receive a £200 penalty - and another £200 for each subsequent late submission.

From the 2027-28 tax year onwards, the full penalty system applies. Late quarterly updates will add penalty points, and the 4-point threshold triggers the £200 charge.

Late payment penalties

If you pay your tax late, penalties work in stages:

• Day 15: First late payment penalty begins to accrue
• Day 30: Additional penalty charge
• Day 31 onwards: Daily penalty accrues until payment is made

In the first year, the day-15 penalty is waived - giving you extra breathing room if payments are slightly delayed.

HMRC's Time to Pay arrangements are still available if you're struggling with a bill. Reasonable excuse provisions also apply - if you have a genuine reason for a late submission or payment, you can appeal. GOV.UK

The upside no one talks about

Most coverage of MTD focuses on the obligations. But there are genuine benefits to keeping up-to-date records:

• Tax estimates whenever you want. With quarterly figures submitted, you can see a running estimate of your tax position throughout the year - no more nasty surprises in January.
• Catch expenses you'd otherwise miss. Recording transactions as they happen means fewer forgotten receipts and unclaimed costs at year end.
• Errors caught early. Quarterly updates mean HMRC flags discrepancies in months, not years. Smaller issues are easier to resolve.
• Less to do at year end. With four quarters already submitted, your Final Declaration is a review and confirmation - not a frantic scramble through a shoebox of receipts.
• Submission takes seconds. With bridging software, the actual submission to HMRC is a few clicks. The real work is the record-keeping - and you're already doing that.

This guide is for information only and does not constitute tax advice. Always check GOV.UK for the latest guidance.