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 approved digital 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 approved software throughout the year, submitting a quarterly summary of income and expenses to HMRC (four times per year instead of once), and making a final End of Period Statement and crystallisation declaration at the end of the tax year.
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.
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 from April 2026
MTD for Income Tax Self Assessment (ITSA) becomes mandatory in two stages. From 6 April 2026, sole traders and landlords with gross income over £50,000 per year must comply. From April 2027, the threshold drops to £30,000.
If your combined income from self-employment and property is above the threshold, you must be using MTD-compatible software from the start of the 2026–27 tax year. Signing up before the deadline is recommended. HMRC requires advance registration.
Penalties for non-compliance with MTD are points-based. Late or missed quarterly submissions earn penalty points, and once you accumulate enough points, a financial penalty is applied.
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. Exemptions must be applied for. They are not automatic.
Partnerships, trusts, and companies are not in scope for MTD ITSA, though they will be addressed in future phases.
How to Get Ready
The most important action is to choose MTD-compatible software and start using it before your mandatory start date. Using software for a full tax year before you are mandated will make the transition much smoother.
You should also register for MTD with HMRC before your start date. You cannot submit MTD updates without first enrolling. Your software provider should guide you through this.
FileThat supports full MTD for VAT and MTD for Income Tax. It handles quarterly submissions, digital record keeping, and the End of Period Statement, 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 for the April 2026 start. MTD for Income Tax applies from 6 April 2026 to sole traders and landlords with qualifying income above £50,000. The threshold drops to £30,000 from April 2027. Below those levels you carry on filing a normal Self Assessment return, though you can join MTD voluntarily if you want to.
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, 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.
How much does Making Tax Digital software cost?
Most providers charge a monthly subscription, typically £10 to £35 a month, which runs whether you file that month or not. 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 late or missed quarterly update earns a penalty point, and once you reach the points threshold HMRC applies a financial penalty. Points expire over time if you file on schedule, so a single slip is recoverable but a pattern is not.
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