The Making Tax Digital (MTD) for Income Tax initiative will significantly change how millions of sole traders and landlords report their income to HM Revenue & Customs (HMRC). The 2024 Autumn Budget confirmed that by the end of the current parliament, digital reporting will be compulsory for sole traders and landlords whose annual income (not profit) exceeds £20,000.
Here’s a simple guide to help you understand these changes.
What is Making Tax Digital?
Making Tax Digital is a government initiative aimed at making the UK’s tax system one of the most advanced digital tax administrations in the world. Its goal is to simplify tax reporting, making it easier and more accurate for businesses.
The first phase was MTD for VAT, which started in 2019. Initially, only certain VAT-registered businesses had to keep digital records and submit VAT returns digitally. Since 1st April 2022, all VAT-registered businesses must comply.
MTD for Income Tax is the second phase, replacing the current annual Self Assessment tax return system. It will start in April 2026 for sole traders and landlords above a certain income threshold. The joining date for partnerships has not yet been announced. HMRC is already testing the new system in a closed beta.
What changes under Making Tax Digital for Income Tax?
The main change is that affected individuals will submit four quarterly updates per year about their business income and expenses, rather than one annual return. You will also need to submit a final statement at the end of each tax year.
Who is affected by MTD for Income Tax?
Initially, sole traders and landlords earning more than £50,000 annually from business or property will be required to comply from 6th April 2026.
From April 2027, this threshold reduces to £30,000, and from April 2028, it will include those earning over £20,000 annually. The joining date for partnerships has yet to be announced.
What do you need to do under the new rules?
If you’re a sole trader or landlord affected by MTD, starting from 6th April 2026, you must:
– Keep digital records of your business income and expenses using approved software.
– Submit quarterly updates to HMRC for each income stream (business or property).
– Submit a final declaration at the end of the tax year.
Digital record keeping
Under MTD, all your business income and expenses, including all sole trader and property income, must be recorded digitally. It’s recommended to start practising this early to be fully prepared.
Use accounting software registered with HMRC, enabling direct bank transaction imports and efficient management of invoices, expenses, projects, etc.
Quarterly updates
After joining MTD, you must send a summary of your business income and expenses digitally to HMRC every three months.
Quarterly deadlines for submitting updates are:
- 7th August
- 7th November
- 7th February
- 7th May
Finalising your business income
At the end of the tax year, you must finalise your business income with a final declaration, replacing the traditional Self Assessment.
This declaration confirms the quarterly updates, adds personal income or allowances information, and makes any necessary adjustments. The final declaration and tax payment are due by 31st January of the following tax year.
What should you do now?
Because these rules depend on income thresholds, monitor your annual income carefully. It’s wise to start digital record-keeping practice during the current tax year when there’s no risk involved, helping you smoothly transition when reporting becomes mandatory.
We recommend FreeAgent software as a cost-effective solution for sole traders and landlords. It is free if you use a bank account within the NatWest banking group. You can link existing business accounts, but free use requires active NatWest group banking. Mettle, a simplified online NatWest account, is also free. Even if you’ve not previously used a separate business account, opening one will now help separate business and personal expenses clearly.
Using the Mettle-FreeAgent combination, you can start free digital record-keeping now, preparing early for the new system.
Our company is a FreeAgent partner, and we can assist with initial software setup. If you’re interested, please let us know, and we’ll arrange the details.
