What is Making Tax Digital? A Complete Guide for UK Sole Traders
Making Tax Digital (MTD) is a government initiative that requires millions of UK taxpayers to keep digital records and submit tax information to HMRC through compatible software. It is the largest overhaul of UK tax administration since self-assessment was introduced in the 1990s. If you are a sole trader, landlord, or self-employed, MTD will directly affect how you manage and report your finances.
Why HMRC Introduced Making Tax Digital
HMRC estimates that "avoidable" tax errors cost the UK billions each year, largely due to mistakes on paper tax returns, lost receipts, and miscalculated figures. Making Tax Digital was designed to reduce this tax gap by moving record keeping and filing into MTD-compatible software.
The shift to digital also means HMRC receives more up-to-date information about your income. Rather than waiting until January each year to find out what you earned in April, HMRC will receive quarterly summaries throughout the year. The goal is fewer surprises and fewer errors on both sides.
What MTD Means in Practice
Under MTD, you can no longer keep records in a paper ledger or a basic spreadsheet and type figures into HMRC's website at the end of the year. You must use HMRC-recognised software that stores records digitally and submits data directly to HMRC via their API.
For most sole traders this means: recording every sale and expense in MTD-compatible software throughout the year, submitting a quarterly update to HMRC four times a year, each covering the tax year so far, and making a Final Declaration (what used to be called crystallisation) after the tax year ends.
The practical impact is smaller than it sounds. If you already use accounting software or a modern banking app, you may already be capturing much of this data. The main change is the quarterly submission requirement. The guide to what a quarterly update is and what the tax return adds sets the two side by side.
MTD for VAT: Already Mandatory
MTD for VAT became mandatory for all VAT-registered businesses in April 2022. If you are VAT registered, regardless of your turnover, you are already required to keep digital VAT records and submit returns through compatible software. There is no opt-out.
If you are VAT registered and not yet using MTD-compatible software, you are already non-compliant and may receive a penalty notice from HMRC.
MTD for Income Tax: Mandatory Since April 2026
MTD for Income Tax Self Assessment (ITSA) is being introduced in stages. Since 6 April 2026, sole traders and landlords with gross income over £50,000 a year have had to comply. From April 2027 the threshold drops to £30,000, and from April 2028 to £20,000.
If your combined income from self-employment and property is above the threshold, you must use MTD-compatible software for the 2026–27 tax year onwards. If you are in scope and have not signed up yet, do it now. If you have only just started trading, the guide for the newly self-employed explains which tax return decides when you join.
Penalties for MTD for Income Tax are points-based. Each missed quarterly update or tax return deadline earns a penalty point, and at four points HMRC charges a £200 penalty. For the 2026–27 tax year, the first year, HMRC has said there are no penalties for missing a quarterly update deadline. If you are required to join in April 2027, Budget 2026 announced no points for your 2027-28 quarterly updates, though it is not law yet. Late tax returns and late payments are still penalised. Our MTD penalty calculator shows how points build up deadline by deadline.
Who is Exempt from MTD?
HMRC has confirmed exemptions for taxpayers who cannot use digital tools for religious reasons, or where it is genuinely not practicable due to disability, age, remoteness of location, or other reasons. These exemptions must be applied for. They are not automatic.
Some groups will not have to use MTD for Income Tax until further notice: Budget 2026 named people eligible for qualifying care relief (such as foster carers and shared lives carers), non-UK resident entertainers and sportspeople, and some people expected to be non-UK resident. The law for this is due before April 2027. People with trust or estate income, or who use averaging adjustments, are exempt until April 2027 under HMRC's current guidance.
Partnerships, trusts, and companies are not in scope for MTD ITSA, though they will be addressed in future phases.
How to Get Ready
If you are already in scope, choose MTD-compatible software and sign up now. If your start date is April 2027 or April 2028, using software for a full tax year before you are mandated makes the transition much smoother.
You should also sign up for MTD for Income Tax with HMRC before your start date. Connecting software to HMRC does not sign you up, and you cannot send updates until you are: see how to sign up before connecting software.
FileThat supports full MTD for VAT and MTD for Income Tax. It handles quarterly submissions, digital record keeping, and the Final Declaration, all in one place, at a flat fee per filing rather than a monthly subscription.
Frequently Asked Questions
Do I need to sign up for Making Tax Digital if I earn under £50,000?
Not yet. Since 6 April 2026, MTD for Income Tax has applied to sole traders and landlords with qualifying income above £50,000. The threshold drops to £30,000 from April 2027 and £20,000 from April 2028. Below those levels you carry on filing a normal Self Assessment return, though you can join MTD voluntarily if you want to. Check whether MTD applies to you.
Is the £50,000 threshold based on turnover or profit?
Turnover, not profit. HMRC calls it qualifying income and it means your gross income from self-employment and property before you deduct any expenses. If you turn over £60,000 and make £25,000 profit, you are in scope from April 2026.
Do I still have to file a Self Assessment tax return under MTD?
You still settle your tax once a year, but the mechanism changes. Instead of a single Self Assessment return you send four quarterly updates during the year (the deadline finder lists the dates), then a final declaration after the tax year ends that confirms your full position. The final declaration deadline stays at 31 January.
Can I use a spreadsheet for Making Tax Digital?
You can keep records in a spreadsheet, but you cannot type figures into HMRC's website. The data has to reach HMRC through recognised software via a digital link, which means either bridging software that reads your spreadsheet or record-keeping software you enter transactions into directly. FileThat does both: see bridging from a spreadsheet.
How much does Making Tax Digital software cost?
Most providers charge a subscription, which runs whether you file that month or not. The paid plans we compare cost from about £101 to £259 a year including VAT. FileThat charges per submission with no subscription, between £3.99 and £5.99 depending on your own income, and final declarations are free. Four quarterly updates cost a fraction of a yearly plan.
What happens if I do not comply with Making Tax Digital?
MTD penalties are points-based. Each missed quarterly update or tax return deadline earns a penalty point, and at four points HMRC charges a £200 penalty, then another £200 for each deadline missed after that. For the 2026-27 tax year HMRC gives no points for late quarterly updates, but late returns and late payments are still penalised. If you are required to join in April 2027, Budget 2026 announced no points for your 2027-28 quarterly updates, though it is not law yet. A point below the threshold is removed 24 months after the missed deadline.
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