Making Tax Digital (MTD) for Sole Traders: What You Need to Know

Making Tax Digital is HMRC's programme to modernise the UK tax system by requiring businesses and individuals to keep digital records and submit tax information to HMRC using compatible software. Rather than filing a single annual tax return, MTD for Income Tax Self Assessment requires sole traders to submit quarterly summary updates of their income and expenses, followed by an end-of-period statement and a final declaration.\n\nThe programme has been running for VAT since April 2019, requiring VAT-registered businesses to keep digital records and file VAT returns through compatible software. MTD for Income Tax Self Assessment extends this approach to sole traders and landlords, representing the most significant change to self-employment tax reporting in decades.\n\nFor tradespeople, MTD means moving from an annual summarisation of your business figures to a quarterly reporting cycle. Each quarter, you submit a digital summary of your income and expenses to HMRC through MTD-compatible software. This does not change the amount of tax you pay, but it changes how and when you report your figures. HMRC's stated aim is to reduce errors, give taxpayers a clearer picture of their tax position throughout the year, and make the tax system more efficient.\n\nMTD does not replace Self Assessment entirely. You will still have end-of-year obligations and a final declaration that functions similarly to the current tax return. However, much of the data will already be with HMRC through your quarterly updates, making the year-end process simpler and faster.

MTD for Income Tax Self Assessment is being rolled out in phases based on income thresholds. From April 2026, sole traders and landlords with gross self-employment or property income above 50,000 pounds must comply with MTD ITSA. From April 2027, the threshold drops to include those with income above 30,000 pounds. The government has indicated it intends to extend MTD further to lower income thresholds in future, but no dates have been confirmed for those below 30,000 pounds.\n\nThe income threshold is based on your gross income from self-employment and property combined, not your profit. This is an important distinction for tradespeople. If you invoice 55,000 pounds of work in a year but your profit after expenses is only 30,000 pounds, you are still above the 50,000 pound threshold and must comply from April 2026.\n\nIf you are a sole trader tradesperson with income below 30,000 pounds, you are not currently required to join MTD ITSA but can volunteer to do so. There may be advantages to volunteering early, as it encourages better record-keeping habits and gives you a running view of your tax position. However, most smaller sole traders will likely wait until it becomes mandatory for their income level.\n\nFor VAT-registered tradespeople, MTD for VAT has been mandatory since April 2022 regardless of turnover. If you are already filing VAT through compatible software, you will be somewhat familiar with the digital record-keeping requirements, though MTD ITSA has its own specific rules and submission formats.

Under MTD ITSA, the tax year is divided into four standard quarters: 6 April to 5 July, 6 July to 5 October, 6 October to 5 January, and 6 January to 5 April. After each quarter, you have until the seventh day of the month following the quarter end to submit your update. This gives deadlines of 7 August, 7 November, 7 February, and 7 May.\n\nEach quarterly update is a summary of your business income and expenses for that period, submitted digitally through compatible software. You do not need to submit individual receipts or invoices, just category totals. The categories align with the existing SA103F expense categories, so if you are already tracking your costs in those categories using TradeTally, the quarterly update process is straightforward.\n\nAfter your fourth quarterly update, you submit an End of Period Statement by 31 January following the end of the tax year. This allows you to make any adjustments, add capital allowances, and finalise your figures for the year. Finally, you submit a Final Declaration, also by 31 January, which is the equivalent of your current Self Assessment filing and confirms that your figures are complete and correct.\n\nThe quarterly updates are not tax returns and do not trigger tax payments. Your actual tax payment schedule remains the same: a balancing payment and first payment on account by 31 January, and a second payment on account by 31 July. The quarterly updates simply keep HMRC informed of your running position and help you understand your emerging tax liability throughout the year.

To comply with MTD ITSA, you must use software that is recognised by HMRC as compatible. This means the software must be able to maintain digital records of your income and expenses, submit quarterly updates to HMRC through their API, file your End of Period Statement, and submit your Final Declaration. HMRC publishes a list of compatible software on gov.uk.\n\nFor tradespeople, the key considerations when choosing software are ease of use on mobile devices since you are often on-site, the ability to photograph and store receipts digitally, invoice generation, mileage tracking, and the ability to categorise expenses in line with SA103F categories. Software that does all of this while also handling MTD submissions eliminates the need for multiple tools.\n\nTradeTally is designed specifically for sole trader tradespeople and handles MTD quarterly submissions directly. Because you already track invoices, expenses, and mileage in the app throughout the year, generating quarterly updates requires minimal additional effort. The app submits your figures to HMRC at the appropriate times and provides confirmation of each submission.\n\nWhen evaluating software, be cautious of products that charge per quarterly submission or have hidden MTD-related fees. Some providers offer basic record-keeping for free but charge for MTD submissions. Understand the total cost of using any software over a full tax year, including all four quarterly updates, the End of Period Statement, and the Final Declaration.

Even if MTD ITSA does not apply to you until April 2026 or 2027, preparing now will make the transition smoother. The most important step is to start keeping digital records consistently. This means logging every invoice, receipt, and business expense in software rather than relying on paper records, spreadsheets, or shoeboxes of receipts.\n\nStart categorising your expenses according to the SA103F categories used by HMRC. These include cost of goods, vehicle costs, travel expenses, premises costs, administrative expenses, advertising, professional fees, interest on business loans, telephone costs, and other allowable expenses. If your software categorises expenses this way from the outset, your quarterly updates will be simple summaries of these categories.\n\nGet into the habit of recording transactions promptly. Under MTD, you will need to submit quarterly, so leaving everything to the end of the year is no longer viable. Aim to log income and expenses within a few days of the transaction. TradeTally makes this easy with receipt scanning, automatic invoice tracking, and bank feed integration.\n\nFinally, check whether your current income level means you will be in the first or second wave of MTD ITSA. If you are close to the 50,000 or 30,000 pound threshold, monitor your income carefully. Remember that the threshold is based on gross income, not profit, so even high-expense businesses with modest profits may be caught if their turnover is above the threshold.