Making Tax Digital (MTD) for Income Tax is now live for sole traders and landlords earning over £50,000. If you're affected, the way you manage and report your tax has changed significantly. Here's what you need to know.

MTD for Income Tax is HMRC's shift from annual tax returns to digital, quarterly reporting. Instead of submitting everything once a year via Self Assessment, you'll keep digital records throughout the year and send income and expense summaries to HMRC every three months, using approved software.

You still submit one tax return per year and pay your tax bill by the same deadlines. What's new is the digital record keeping and the quarterly updates.

MTD for Income Tax is being rolled out in stages based on your qualifying income, that's your total gross income from self-employment and/or property before expenses, based on your most recent tax return:

• £50,000 or more (2024-25 tax return) – you are now required to comply with MTD
• From 6 April 2027 – those whose 2025-26 tax return showed qualifying income over £30,000
• From 6 April 2028 – those whose 2026-27 tax return showed qualifying income over £20,000

It's important to note that not all income counts towards the qualifying income figure. Dividends, pension payments and PAYE income do not factor in, only income from self-employment and property. So if you earned £30,000 from freelancing and £25,000 from renting a property in 2024-25, your qualifying income is £55,000 and you are now required to comply with MTD.

Not sure when your income band is affected? Our full Making Tax Digital guide has the detail. 

If you've recently gone freelance, MTD may still apply to you sooner than you think. HMRC works out your qualifying income based on your most recent Self Assessment tax return, and if your first year of trading was shorter than 12 months, they will annualise your income to estimate your full-year figure. So if you traded for six months and earned £26,000, HMRC would treat your qualifying income as £52,000, putting you in scope now. 

If you started trading part way through the current tax year and find you need to comply, you have two options: catch up on your digital record keeping from the start of the tax year, or begin keeping records from the date you signed up and fill in the earlier period later. Either way, all your quarterly updates must be submitted before you can file your annual tax return.

If you are just starting out and your income is below the current thresholds, it is still worth getting familiar with MTD now. The threshold drops to £30,000 in April 2027 and £20,000 in April 2028, so many sole traders who are not in scope today soon will be. 

1. Get HMRC-approved software

HMRC does not provide its own software. You'll need a compatible product, either an all-in-one app that handles record keeping, quarterly updates and your tax return, or a combination of tools. Use HMRC's software finder tool to find an approved option.

Before committing to a product, it's worth taking the time to find something that actually fits the way you work. Think about how you currently track your income and expenses, whether you want to connect it to your business bank account, and whether you need something simple and low cost or a more fully featured accounting package. Many providers offer a free trial, so test a couple before you decide.

If you currently track your income and expenses on a spreadsheet, you can continue to do so, but you'll need bridging software that connects your spreadsheet to HMRC's systems. Speak to your accountant if you use one, as they'll need permission within your software to act on your behalf.

2. Keep digital records

You now need to keep a digital record of every income and expense transaction. Each record needs to capture the amount, date and category, the same categories you'd use for Self Assessment.

3. Send quarterly updates

Your software uses your digital records to generate a quarterly update: a category-level summary of your income and expenses. Crucially, each update sent to HMRC covers the cumulative period from the start of the tax year, not just the previous three months. You don't need to make any accounting or tax adjustments before sending an update.

The key deadlines for 2026-27 are:

If your accounting period ends on 31 March rather than 5 April, you may be able to use calendar update periods instead, which align to calendar month-ends. Check with your software or accountant.

After each update, you'll be able to see an estimated tax bill in your software or HMRC online account.

4. Submit your tax return through your software

Your annual Self Assessment return is still due by 31 January, but it now needs to be submitted through your MTD-compatible software rather than directly through the HMRC portal. Make sure your software supports this, as some products only handle quarterly updates.

HMRC has confirmed there will be no penalty points for missing a quarterly update deadline in 2026-27. But this grace period doesn't extend to your annual tax return or late payment of tax, so those penalties still apply. And you can't submit your tax return until your quarterly updates are done, so it's worth keeping on top of them regardless.

Once the full penalty system kicks in, it works on a points basis:

• Each missed quarterly update earns 1 point. Hit 4 points in a 24-month period and a £200 fine is issued, with a further £200 for each additional point.
• Each missed annual return earns 1 point, with a lower threshold of 2 points before a fine is triggered.
• Late payment penalties scale depending on how far past the due date you pay.

Not necessarily, but quarterly reporting does mean tax admin becomes a more regular part of running your business. 

Many sole traders who previously handled their own Self Assessment are choosing to work with an accountant or bookkeeper to keep on top of the extra reporting. If you do, make sure they have the right permissions set up within your software.

You're not alone. Around 66% of sole traders track their income and expenses on a spreadsheet. Bridging software can connect your existing spreadsheet to HMRC's MTD system, so you don't necessarily have to change how you work. 

For more on good record-keeping habits, see the 3 must-dos for self-employed bookkeeping.

No. MTD for Income Tax applies only to sole traders and landlords. If you operate through a limited company and pay yourself a salary and dividends as a director, MTD for Income Tax does not apply to you.

HMRC confirmed in July 2025 that it has dropped its plans to introduce MTD for Corporation Tax altogether. Limited companies will not be required to keep digital records or submit quarterly updates under MTD rules. Corporation Tax administration continues under the current system for the foreseeable future.

If you are a sole trader who also has a limited company, only your sole trader income counts towards your MTD qualifying income threshold. Your company's Corporation Tax obligations are separate and unaffected.

IPSE has been working closely with HMRC on Making Tax Digital for over six years, and we played a significant role in securing the previous delays to its rollout. We understand the policy intent behind moving to a more digital tax system, and broadly support the direction of travel. But we have been consistent in our view that the pace and design of MTD must not place disproportionate burdens on the smallest businesses, many of whom are already managing tight margins and limited time.

Quarterly reporting is a real operational change, and the ongoing cost of compliant software is an expense that sole traders on modest incomes will feel. As the income threshold drops to £30,000 and then £20,000, we will be making the case to government that bringing very low-income sole traders into scope risks imposing compliance costs that are simply not proportionate to the tax they pay. For someone running a small business on a tight profit margin, the time and money spent meeting MTD requirements could be a genuine burden with little obvious benefit.

If you have any concerns or early experiences of MTD you'd like to share with us, we want to hear from you