What UK sole traders and landlords must do for Making Tax Digital

What to take away

Making Tax Digital for VAT is already in force

If you are VAT-registered, Making Tax Digital already applies to you. MTD for VAT has been compulsory for VAT-registered businesses since April 2022, and it requires digital records and VAT returns filed through compatible software. A VAT-registered sole trader or landlord is therefore already part-way into Making Tax Digital before MTD for Income Tax begins. The rest of this article deals with MTD for Income Tax, the strand that starts for sole traders and landlords in April 2026.

Who MTD for Income Tax actually covers, from sole traders to landlords

Making Tax Digital for Income Tax (MTD ITSA) applies to sole traders and landlords with qualifying income above a threshold. The threshold is currently £50,000, but it will drop to £30,000 in April 2027 and £20,000 in April 2028.

For a sole trader, qualifying income is turnover from self-employment. For a landlord, it is gross rental income. If you have both, add them together. If the total is above the threshold, you are in scope.

HMRC has published a step-by-step guide for sole traders and landlords that explains who is covered and what to do. The guide is a useful starting point for anyone unsure about their status. You can find it at Making Tax Digital for Income Tax for sole traders and landlords: step by step - GOV.UK.

Some people are exempt. If you receive qualifying care relief for looking after a child or a vulnerable adult, you may not have to join. If you receive only property income from abroad, you may not have to join either. If you are a trustee of a trust or estate, you are not covered.

If you are a partner in a partnership, you are not covered for your partnership income. You may still be covered for other income, such as rent. If you are a minister of religion, special rules apply. Check the guidance if you think you might be exempt.

Landlords with property income only, and no self-employment, are still covered if their rental income is above the threshold. This includes landlords who let residential property, commercial property, or a mix. If you let a room in your home under the Rent a Room scheme, that income counts towards the threshold.

If you are a joint landlord, you each count your share of the income.

Sole traders with turnover below the threshold are not covered yet, but they can join voluntarily. Joining voluntarily can help you get used to digital record-keeping. It can also help you avoid a rush later.

If you are a sole trader with income near the threshold, you should monitor your turnover each year. If it goes above the threshold, you will need to join.

If you are a sole trader and a landlord, you must add your incomes together. If the total is above the threshold, you are in scope. This is true even if one income is below the threshold on its own.

For example, if you have £25,000 from self-employment and £30,000 from rent, your total is £55,000, so you are in scope.

HMRC expects around 800,000 sole traders and landlords to be in scope from April 2026. That number will grow as the threshold drops. If you are an accountant, you should be identifying which of your clients are affected. You should also be planning how to move them onto digital records.

The HMRC sign-up deadline and quarterly update timetable

You must sign up for MTD for Income Tax before your first quarterly update is due. The sign-up process is done through your HMRC online account. You will need your National Insurance number, your Unique Taxpayer Reference (UTR), and details of your business or property income.

You also need to choose your accounting period. Most people use the tax year, which runs from 6 April to 5 April.

HMRC has a guidance page on signing up. It explains the steps and the information you need. You can read it at Sign up for Making Tax Digital for Income Tax - GOV.UK.

Once you are signed up, you must send quarterly updates. These are not full tax returns. They are summaries of your income and expenses for each quarter. You must send them using compatible software. The quarters are:

You must send each update by the deadline. The deadlines are:

Each quarterly update is due by the 7th of the month after the quarter ends: 7 August, 7 November, 7 February and 7 May.

After the fourth quarter, you must send a final declaration. This replaces the Self Assessment tax return for your self-employment and property income. The deadline for the final declaration is 31 January after the end of the tax year. For example, for the tax year 2026-27, the final declaration is due by 31 January 2028.

If you join MTD partway through a tax year, you may need to send updates for the quarters you were not in MTD. HMRC will tell you what to do.

If you are already using accounting software, you may be able to import your data. If you are not, you will need to start keeping digital records from the date you join.

You can sign up before the tax year starts. If you sign up after the tax year starts, you may need to send updates for earlier quarters. HMRC will not charge a penalty for the first year if you make a mistake, but you should still try to get it right.

Penalties for late submission will apply from the second year. HMRC has said these will be points-based: a point is added for each missed quarterly update, and a financial penalty follows once the points threshold is reached.

If you are an accountant, you should be registering your clients for MTD. You can do this through your agent services account. You will need to be authorised by your client. You should also check that your software can send updates on behalf of clients.

What counts as digital record-keeping under MTD

Under MTD, you must keep your records digitally. This means you cannot rely on paper receipts and a spreadsheet alone. You must use software that can record your income and expenses digitally. The software must be able to send updates to HMRC. You must also keep digital records of your business transactions.

You do not need to keep every receipt digitally, but you must be able to show how you arrived at your figures. You can use a scanner or a phone app to capture receipts. You can also use bank feeds to import transactions. The key is that the records are digital and can be linked to your quarterly updates.

If you use a spreadsheet, it must be compatible with MTD. HMRC has a list of software that can bridge spreadsheets to MTD. You can also use a spreadsheet if you use an API-enabled product. But you cannot just email a spreadsheet to HMRC. You must use compatible software.

Digital record-keeping does not mean you have to go paperless. You can still keep paper documents, but you must also have digital records. For example, you can keep a paper diary of mileage, but you must enter the mileage into your software. You can keep paper receipts, but you must record the amounts digitally.

If you are a landlord, you must keep digital records of your rental income and expenses. This includes rent received, letting agent fees, repairs, insurance, and mortgage interest. You must also keep records of any deposits you hold. If you use the cash basis, you record income when you receive it and expenses when you pay them.

If you are a sole trader, you must keep digital records of your sales, expenses, and any other business income. If you use the cash basis, you record income when you receive it and expenses when you pay them. If you use traditional accounting, you record income when you invoice and expenses when you receive a bill.

HMRC expects you to keep your records up to date. You should not wait until the end of the quarter to enter all your transactions. If you do, you may miss the deadline. You should aim to record transactions at least monthly. If you are an accountant, you should encourage your clients to keep records up to date.

Choosing compatible software from the GOV.UK list

You must use software that is compatible with MTD for Income Tax. HMRC publishes a list of compatible software on GOV.UK. You can find it at Choose the right software for Making Tax Digital for Income Tax - GOV.UK.

The list includes free and paid options. Some software is designed for sole traders, some for landlords, and some for both.

Well-known products on the GOV.UK list include Xero, QuickBooks, FreeAgent and Sage, alongside cheaper tools built specifically for sole traders and landlords. The list also flags which products work on a phone or tablet and which suit landlords with several properties. Check it before you buy, because products and their features change.

When choosing software, consider the following:

You should also consider the cost. Some software is free for small businesses, but may have limited features. Paid software may cost between £10 and £50 per month. Some software charges per tax return, which can be expensive if you have multiple clients.

If you are an accountant, you may want software that supports multiple clients and has an agent dashboard.

HMRC does not recommend one software over another. You should choose software that meets your needs. You can try free trials before you buy. You can also ask your accountant for advice.

If you are an accountant, you should be familiar with the software your clients use. You may also want practice software that integrates with client software and pulls figures across without re-keying. Our accounting software selection guide for practices sets out what to look for.

If you use spreadsheets, you can use a bridging tool to connect them to MTD. These tools are also on the GOV.UK list. They allow you to keep your spreadsheets but still send updates to HMRC. This can be a good option if you have complex records. However, you must ensure the bridging tool is compatible.

If you change software, you must ensure your data transfers correctly. You should keep a backup of your old data. You should also check that your new software can import your data. If you are an accountant, you should help your clients migrate. You should also check that your professional indemnity insurance covers software advice.

Cash basis, simplified expenses and allowable costs in a digital ledger

Under MTD, you can use the cash basis to calculate your profit. The cash basis is a simplified way of accounting. You record income when you receive it and expenses when you pay them. You do not need to record debtors or creditors.

You can use the cash basis if your turnover is below £150,000. You can find out more at Cash basis: Overview - GOV.UK.

The cash basis is now the default for sole traders and landlords. If you want to use traditional accounting, you must opt out. The cash basis can make digital record-keeping easier because you only record transactions when money changes hands. You do not need to record accruals. This can be simpler for small businesses.

If you use the cash basis, you can still claim allowable expenses. These include:

You cannot claim entertaining expenses or fines. You also cannot claim your own wages or drawings. If you use the cash basis, you can claim capital expenses as allowable expenses, rather than claiming capital allowances. This can be simpler for small purchases.

If you are a landlord, you can also use the cash basis. You can deduct allowable expenses from your rental income. These include letting agent fees, repairs, insurance, and council tax.

You cannot deduct mortgage interest as an expense. Instead, you get a tax credit of 20% on your mortgage interest. This applies whether you use the cash basis or traditional accounting.

Simplified expenses are flat rates you can use instead of actual costs. They are available for:

For example, you can claim 45p per mile for the first 10,000 miles and 25p per mile after that. You can claim a flat rate for working from home, such as £6 per week if you work 25 to 50 hours per month.

You can find the rates at Simplified expenses if you're self-employed: Overview - GOV.UK.

Simplified expenses can reduce the number of records you need to keep. But you must still keep digital records of your income and expenses. You must also keep records of your mileage if you claim simplified expenses for vehicles. You can use a mileage log app to record your journeys.

If you are an accountant, you should help your clients choose the right basis. You should also ensure their software supports the basis they choose. If they use simplified expenses, you should check that the software can handle flat rates. If not, you may need to make adjustments manually.

How to choose an accountant prepared for Making Tax Digital

Not all accountants are ready for MTD. You should ask potential accountants about their MTD experience. You should also check that they are qualified and regulated. In the UK, accountants may be members of ICAEW, ACCA, CIOT, AAT, or other bodies. You can check their membership on the body's website. You should also check they have professional indemnity insurance.

When choosing an accountant, work through our checklist for choosing an accountant. The questions to ask are:

You should also ask about their process. How will they collect your records? How often will they review your records? How will they remind you of deadlines? How will they handle errors? A good accountant will have a clear process for MTD.

If you are a landlord, you may need an accountant who understands property tax. If you are a sole trader, you may need an accountant who understands your industry. You should also consider whether you want an accountant who uses cloud software.

Most MTD-ready accountants will use cloud software. They may also offer their own software as part of their service.

You should also consider the cost. MTD may increase your accounting fees because of the extra work. You should ask for a fixed monthly fee if possible. You should also ask what is included. Some accountants charge extra for software, some include it. You should get a written quote before you appoint them.

If you are an accountant, you should be marketing your MTD services and training your staff. You should consider the 2027 MTD wave, when the threshold drops to £30,000. That will bring many more clients into scope.

You should also look at where the real work will be, from MTD readiness to record repair. You may need to hire more staff or invest in technology.

What MTD means for Self Assessment filing after transition

MTD for Income Tax does not replace Self Assessment entirely. You will still need to file a Self Assessment tax return if you have income from other sources. For example, if you have dividend income, savings income, or foreign income, you may still need to file a return.

You may also need to file a return if you are a partner in a partnership or a trustee.

For your self-employment and property income, you will no longer file a Self Assessment return. Instead, you will send quarterly updates and a final declaration. The final declaration replaces the self-employment and property pages of the Self Assessment return. You will still need to declare other income on a Self Assessment return if required.

If you are below the threshold, you can join voluntarily. You can also join if you are above the threshold but want to start early.

During the transition, you may need to send both MTD updates and a Self Assessment return. This can happen if you have income that is not covered by MTD. For example, if you have rental income from a property that is not in MTD, you may need to report it on a Self Assessment return.

If you are an accountant, plan for the transition. Review your client list and identify who is affected. Review your software and processes. You may need to change your workflow to handle quarterly updates, train your staff, and consider how you will charge for MTD services.

HMRC has said that it will not charge penalties for late submission in the first year of MTD, unless the delay is deliberate. However, you should still aim to meet deadlines. Penalties will apply from the second year. You should also be aware that interest may be charged on late payments.

Common questions