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Making Tax Digital for Sole Traders: What You Need to Know (2026/27)

Published 5 April 2026 · 12 min read

Making Tax Digital (MTD) is HMRC's plan to move the UK tax system online. MTD for VAT has been running since 2019. Now comes the bigger change: MTD for Income Tax Self Assessment (MTD for ITSA), which affects millions of sole traders and landlords.

If you file a Self Assessment tax return and have self-employment or property income, this will affect you. The only question is when.

Who is affected and when

MTD for Income Tax rolls out in two phases based on your qualifying income — your gross turnover from self-employment plus gross property income, before expenses:

Start date	Who it applies to	Based on
6 April 2026	Income over £50,000	2024/25 Self Assessment return
6 April 2027	Income over £30,000	2025/26 Self Assessment return
To be confirmed	Income over £20,000	Date not yet announced

What MTD requires you to do

MTD for Income Tax has three core obligations:

1. Keep digital records: Your income and expense records must be maintained digitally using HMRC-recognised software. Paper records and standalone spreadsheets alone are not sufficient.
2. Submit quarterly updates: Every three months, you send a summary of your income and expenses to HMRC through your software. This is not a tax return — it's a progress report.
3. Submit an End of Period Statement (EOPS) and final declaration: After the tax year ends, you confirm your figures are complete and submit your final declaration — this replaces the Self Assessment tax return.

Quarterly update deadlines

Each tax year is split into four quarters. After each quarter ends, you have until the following deadline to submit:

Quarter	Period covered	Submission 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

The End of Period Statement and final declaration are due by 31 January following the end of the tax year — the same deadline as the current Self Assessment return.

What counts as "digital records"

HMRC requires you to record the following digitally for each transaction:

• Date of the transaction
• Amount
• Category (matching HMRC's income/expense classifications)

For expenses, you should also record:

• Name of the supplier
• VAT amount (if VAT registered)
• A description or note of what was purchased

You do not need to send individual receipts to HMRC with your quarterly updates. But you must keep the underlying records (digital photos of receipts, bank statements, invoices) for at least five years in case of an enquiry.

What software do you need?

You need software that is both:

1. HMRC-recognised — listed on HMRC's official software page as compatible with MTD for Income Tax
2. Capable of digital record-keeping and submission — can store your records and send quarterly updates and final declarations to HMRC via their API

Major providers include FreeAgent, Xero, QuickBooks, Sage, and others. HMRC maintains an updated list of compatible software on GOV.UK.

Many sole traders will use a combination: a record-keeping app for capturing receipts and logging expenses day-to-day, plus MTD submission software (or an accountant's software) to file the quarterly updates.

Penalties for non-compliance

HMRC is introducing a new points-based penalty system for MTD (replacing the old flat penalties):

Late submission penalties

• You receive 1 point for each late quarterly update
• Once you reach 4 points (i.e. four late submissions), you receive a £200 penalty
• Each subsequent late submission while at the threshold also triggers £200
• Points expire after 24 months of on-time submissions

Late payment penalties

• Tax unpaid after 15 days: penalty of 2% of tax owed at that date
• Tax unpaid after 30 days: a further 2% of tax still outstanding
• Tax unpaid after 30 days: additional daily penalty at 4% per annum on the outstanding amount

Interest on late payments

HMRC charges interest on overdue tax at the Bank of England base rate plus 2.5%. As of April 2026, that's approximately 7% per annum.

What about VAT-registered sole traders?

If you're already filing MTD for VAT, you know the quarterly reporting process. MTD for Income Tax is separate — you'll need to submit VAT returns and income tax quarterly updates. The good news is that most MTD-compatible software handles both.

Your digital records for income tax can overlap with your VAT records, but the submissions are to different HMRC systems.

What if I use an accountant?

Your accountant can submit quarterly updates and the final declaration on your behalf using agent software. But the obligation to keep digital records is yours. You cannot hand your accountant a carrier bag of receipts once a year and expect them to sort it out quarterly.

The most efficient approach:

1. You capture receipts and log expenses digitally throughout the quarter
2. You export or share your records with your accountant
3. Your accountant reviews, adjusts if needed, and submits the quarterly update

This is faster and cheaper than the old annual scramble — less time spent by your accountant means lower fees.

How to prepare now

Whether you're in the £50,000+ bracket (starting April 2026) or the £30,000+ bracket (April 2027), here's what to do now:

1. Check if you're affected

Look at your most recent Self Assessment return. Add up your gross self-employment income (box 15 on SA103F) and any gross property income. If the total exceeds £50,000, you're in the first wave.

2. Start keeping digital records now

Don't wait until the deadline. The sooner you build the habit, the less painful the transition. Even if you're below the threshold, digital records save you time at year end.

3. Choose your software stack

Decide whether you'll use all-in-one accounting software, a combination of apps, or work through your accountant. Test it with real transactions before the first quarterly deadline.

4. Talk to your accountant

If you use an accountant, discuss how you'll work together under MTD. Who submits? How do you share records? What software will you both use? Get this sorted before the first quarter ends.

5. Sign up for HMRC's MTD service

You'll need to register for MTD for Income Tax through your HMRC online account. HMRC will send guidance and reminders as your start date approaches.

Frequently asked questions

Does MTD replace Self Assessment?

Eventually, yes. The final declaration under MTD replaces the Self Assessment tax return. But during the transition, if you have income sources not covered by MTD (such as capital gains or foreign income), you may still need to complete parts of a return.

What if my income drops below the threshold?

Once you're in MTD, you stay in unless your qualifying income drops below £30,000 for three consecutive tax years. You can then apply to leave.

Are partnerships included?

General partnerships are expected to join MTD from April 2027, but the exact date has not been confirmed. Limited liability partnerships (LLPs) and other complex partnerships are excluded for now.

What about limited companies?

MTD for Income Tax does not apply to limited companies. They file Corporation Tax, which has its own digital requirements. MTD for ITSA applies only to sole traders and landlords who file Self Assessment.

Can I use free software?

HMRC offers free MTD-compatible software for some taxpayers (typically those with simple affairs). Commercial options offer more features. Check HMRC's software list for current free options.

How PocketReceipt helps with MTD

PocketReceipt is a receipt scanner and expense tracker built for UK sole traders. While it's not MTD submission software, it solves the hardest part of MTD compliance: keeping accurate digital records throughout the year.

• AI receipt scanning: Snap a photo and AI extracts the date, supplier, amount, VAT, and category automatically
• HMRC-aligned categories: Expenses are mapped to the correct SA103F boxes, ready for your quarterly update
• Mileage tracking: Log business miles with date, destination, and purpose — exactly what HMRC requires
• Smart warnings: Flags duplicates, missing fields, and capital items before you save
• Organised exports: CSV and PDF exports that your accountant or MTD software can use directly
• Accountant Dashboard: Your accountant can view your records in real time — no more chasing for receipts at quarter end

The goal: when your quarterly deadline arrives, your records are already complete, categorised, and ready to submit. No last-minute scramble. Free on iOS and Android.

Key dates summary

Date	What happens
6 April 2026	MTD for ITSA starts (£50,000+ income)
7 August 2026	First quarterly update deadline (Q1)
7 November 2026	Q2 quarterly update deadline
7 February 2027	Q3 quarterly update deadline
6 April 2027	MTD for ITSA extends to £30,000+ income
7 May 2027	Q4 quarterly update deadline (2026/27)
31 January 2028	Final declaration deadline (2026/27)

Related guides: Every expense a sole trader can claim · Self Assessment & MTD deadlines 2026/27 · HMRC mileage rates · Best receipt scanner apps