MTD for Sole Traders: A Complete Guide

Making Tax Digital for Sole Traders: What Changes from April 2026

Last updated: February 2026

If you work for yourself and file a Self Assessment tax return, Making Tax Digital for Income Tax (MTD ITSA) will change how you report your income to HMRC. The first mandation date is 6 April 2026. This guide covers who is affected, how the quarterly reporting cycle works, what expenses you can claim, and the practical steps to move from paper records or spreadsheets to MTD-compatible software.

Sole traders make up the largest group brought into MTD ITSA. HMRC estimates around 4.2 million self-employed individuals and landlords will eventually fall within scope. Whether you run a single trade or combine self-employment with rental income, the rules below apply to you.

Who counts as a sole trader for MTD purposes

A sole trader is anyone who runs a business as an individual rather than through a limited company or partnership. You do not need to be registered at Companies House. If you complete the self-employment pages of your Self Assessment return, HMRC treats you as a sole trader for MTD purposes.

Common examples include tradespeople, freelancers, consultants, tutors, and delivery drivers. If you have a side business alongside employment, the self-employment income still counts. The test is whether you report it on a Self Assessment return, not whether it is your main source of income.

Qualifying income: gross turnover, not profit

Your qualifying income is calculated by adding your gross self-employment income to any gross UK property income. This is your total turnover before deducting any expenses, capital allowances, or losses. The distinction matters because many sole traders assume the threshold applies to profit. It does not.

For example, a sole trader with £45,000 in self-employment turnover and £8,000 in rental income has qualifying income of £53,000. Even if their taxable profit after expenses is only £28,000, they exceed the Phase 1 threshold and must comply from April 2026. Read our full MTD Income Tax guide for a detailed breakdown of how qualifying income is assessed.

The three phases: when each threshold applies

HMRC is rolling out MTD ITSA in three stages based on qualifying income:

HMRC determines your threshold based on the qualifying income shown on your most recent Self Assessment return. For Phase 1, that means your 2024/25 return filed by 31 January 2026. If your income fluctuates year to year, the figure on that specific return decides whether you are in scope for Phase 1.

Phase 3 uses a slightly different wording: £20,000 or more, rather than “over.” This means £20,000 exactly brings you within scope from April 2028, whereas £50,000 exactly does not trigger Phase 1.

The trading allowance and MTD

HMRC provides a £1,000 trading allowance for self-employment income. If your total self-employment turnover is below £1,000, you do not need to report it on a Self Assessment return and MTD does not apply to that income. However, the trading allowance does not reduce your qualifying income for threshold purposes. If your gross self-employment income is £52,000, you cannot deduct the £1,000 allowance to bring yourself below £50,000.

In practice, the trading allowance is most relevant for those with very small side incomes. If you earn £800 from occasional freelance work and have no property income, you fall outside both Self Assessment and MTD entirely.

Multiple sole trades: separate submissions required

Some sole traders operate more than one business. A web developer who also runs an online shop, for instance, has two separate sole trades. Under MTD ITSA, each trade requires its own set of quarterly updates. If you have two sole trades and a rental property, you will submit twelve quarterly updates per year (four per income source) plus a single Final Declaration.

Your qualifying income is still calculated across all sources combined. You cannot argue that each trade falls below the threshold individually. If trade one earns £32,000 and trade two earns £22,000, your qualifying income of £54,000 puts you in Phase 1.

Cash basis vs accruals: which accounting method to use

Most sole traders use the cash basis of accounting, which records income when received and expenses when paid. Since April 2024, cash basis is the default method for unincorporated businesses with turnover under £150,000. You do not need to elect for it; you simply use it unless you opt out.

The alternative is accruals accounting, which records income when invoiced and expenses when incurred, regardless of when money changes hands. Accruals gives a more accurate picture for businesses with significant debtors or creditors, but adds complexity. If you carry large unpaid invoices at the end of each quarter, accruals may better reflect your position. Otherwise, cash basis is simpler and suits most sole traders well.

Your MTD software will ask you to confirm your accounting method when you set it up. Whichever you choose, your quarterly updates must follow the same method consistently throughout the tax year.

How to categorise expenses for quarterly updates

Each quarterly update requires you to report your income and expenses broken down into HMRC’s standard categories. These mirror the categories on the self-employment pages of the SA103 form. The main headings are:

• Cost of goods sold (materials, stock, direct costs)
• Construction industry subcontractor costs
• Staff costs (wages, salaries, employer NI, pensions)
• Travel and vehicle costs
• Premises costs (rent, rates, utilities, insurance)
• Repairs and maintenance
• Professional and financial fees (accountancy, legal, bank charges)
• Marketing and entertainment
• Office and administrative costs (stationery, phone, software subscriptions)
• Other allowable expenses

You do not need to submit individual receipts with each quarterly update. The update is a summary of totals per category for the quarter. Your software will generate these totals from the transactions you record. HMRC can request supporting evidence during an enquiry, so keep your records for at least five years.

Simplified expenses: flat rates for common costs

HMRC allows sole traders to use simplified expenses (also called flat rate deductions) for certain costs instead of tracking actual expenditure. The two most common are vehicle costs and working from home.

Vehicle costs: Instead of recording fuel, insurance, servicing, and depreciation separately, you can claim a flat rate per business mile. The rates are 45p per mile for the first 10,000 miles and 25p per mile after that. You need a mileage log showing the date, destination, purpose, and miles for each business journey. Personal mileage is excluded entirely.

Working from home: You can claim a flat rate of £6 per week (£312 per year) without any supporting calculations. Alternatively, you can calculate the actual proportion of household costs attributable to business use, based on the number of rooms used and the hours spent working. The flat rate is simpler; the proportional method sometimes produces a higher figure for those who use a dedicated room full-time.

Once you choose simplified expenses for a particular cost, you must use that method for the entire tax year. Your MTD software should support both approaches and prompt you to record the right information.

Quarterly deadlines and the Final Declaration

Under MTD ITSA, the tax year is split into four quarters with fixed submission deadlines:

Each quarterly update is a summary of income and expenses for that period, submitted through your MTD-compatible software. After the fourth quarter, you must file a Final Declaration by 31 January following the end of the tax year. The Final Declaration replaces the traditional Self Assessment tax return. It confirms your total income, claims reliefs and allowances, and finalises your tax liability.

For the 2026/27 tax year, HMRC has confirmed a soft landing period. No penalty points will be issued for late quarterly updates during this first year. Late payment penalties still apply, but you will not accumulate points towards the £200 fixed penalty for missed quarterly filings. From 2027/28, the full penalty points system takes effect: each late update adds one point, and reaching four points triggers a £200 fine.

Worked example: David the plumber transitions to MTD

David is a self-employed plumber based in Leeds. His turnover for 2024/25 was £58,000. He has no property income. His qualifying income of £58,000 places him in Phase 1, starting 6 April 2026.

Currently, David keeps paper receipts in a shoebox and records his income in a basic spreadsheet at the end of each month. His accountant enters the totals into their own system at year-end to prepare his Self Assessment return. This approach will not meet MTD requirements because David’s spreadsheet does not connect to HMRC’s API and his records are not maintained digitally throughout the year.

Step 1: Choose software

David discusses options with his accountant. Given his straightforward trade (no stock, no employees, no complex VAT position), FreeAgent or QuickBooks Self-Employed would both work well. His accountant already uses Xero for other clients, so David opts for Xero to make collaboration easier. He could also use bridging software to continue with his spreadsheet, but decides a full switch will save time in the long run. For guidance on Xero specifically, see our software comparison page.

Step 2: Set up digital records

In February 2026, David creates a Xero account and connects his business bank account. Transactions start pulling through automatically. He sets up categories matching HMRC’s expense headings: vehicle costs (he uses the 45p per mile flat rate, logging roughly 8,000 business miles per year at a value of £3,600), materials, tools, and professional fees.

Step 3: Register for MTD

David’s accountant registers him for MTD ITSA through their Agent Services Account. The software is linked to HMRC via Xero’s built-in MTD connection. David does not need to visit the HMRC website himself.

Step 4: First quarterly update

From 6 April 2026, David records his income and expenses in Xero as he goes. At the end of Q1 (5 July), his records show £14,200 in invoiced and received payments. His expenses for the quarter total £3,400, broken down across materials (£1,600), vehicle mileage (£900 for 2,000 miles at 45p), and professional fees (£900). His accountant reviews the figures and submits the Q1 update to HMRC through Xero by 7 August.

Step 5: Year-end

After Q4, David’s accountant prepares the Final Declaration. Total turnover for the year is £59,400. Total allowable expenses are £15,800. Taxable profit is £43,600. The Final Declaration is submitted through Xero by 31 January 2028, confirming David’s tax position for 2026/27. Because of the soft landing, the one quarterly update David submitted two days late in Q3 did not generate a penalty point.

Practical transition steps for paper-based sole traders

If you currently rely on paper records or a basic spreadsheet, the shift to MTD requires planning. Start at least two to three months before your mandation date.

1. Open a separate business bank account if you do not already have one. This makes bank feed imports into accounting software far cleaner and avoids mixing personal transactions with business ones.
2. Choose your software. Xero, FreeAgent, QuickBooks, and Sage all offer MTD ITSA-compatible packages aimed at sole traders. If you want to keep using a spreadsheet, bridging software such as VitalTax or 123 Sheets connects your spreadsheet to HMRC’s API. See our compatible software guide for a full comparison.
3. Import your opening position. Your software needs a starting point as at 6 April of your mandation year. This means entering any outstanding invoices (if using accruals) or simply starting fresh from that date (if using cash basis).
4. Set up expense categories. Map your existing cost headings to HMRC’s categories. Most software does this automatically, but review the default mappings to ensure they match how you classify your costs.
5. Run a parallel period. If time allows, run your new software alongside your old method for a month or two before April. This builds confidence and highlights any gaps in your setup before quarterly updates become mandatory.

Software options at a glance

Several MTD-compatible software packages cater to sole traders. The right choice depends on your budget, the complexity of your business, and whether your accountant has a preference. The main options are:

• Xero – strong bank feed integration, widely used by accountants, includes MTD ITSA filing. Xero setup and support from Jack Ross.
• FreeAgent – designed for freelancers and sole traders, simple interface, includes Self Assessment and MTD filing in one subscription.
• QuickBooks Self-Employed – lower-cost option for straightforward sole trades, mobile app for receipt capture.
• Sage Accounting – established UK provider, tiered plans from basic bookkeeping to full MTD compliance.
• Bridging software – for those who want to keep using a spreadsheet, tools like VitalTax or 123 Sheets submit your data to HMRC without requiring you to change your record-keeping approach entirely.

MTD ITSA and VAT: overlapping obligations

If your sole trade is also VAT-registered, you already submit VAT returns digitally through MTD for VAT. MTD ITSA is a separate obligation with its own registration, software connection, and quarterly submissions. The two systems do not share data automatically, though most accounting software handles both from a single set of records.

Where possible, align your MTD ITSA quarters with your VAT quarters to reduce the administrative burden. If your VAT quarters run April to June, July to September, and so on, this matches the standard MTD ITSA periods. You would then prepare one set of figures that feeds both submissions.

Frequently asked questions

Do I need to send HMRC my actual receipts each quarter?

No. Quarterly updates are summaries of income and expenses by category. You do not upload individual receipts or invoices. However, you must keep digital records of all transactions in case HMRC opens an enquiry. Records should be retained for at least five years after the 31 January filing deadline for the relevant tax year.

What if my income drops below the threshold after I have registered?

If your qualifying income falls below your phase threshold in a subsequent year, you may be able to leave MTD ITSA. HMRC has indicated that taxpayers whose income drops and stays below the threshold can apply to be exempted. The rules on this are still being finalised, so check with your accountant or monitor GOV.UK for updates.

Can I still use my accountant to file everything?

Yes. Your accountant can submit quarterly updates and the Final Declaration on your behalf through their own software. You still need to maintain digital records, but your accountant can manage the submissions. Many sole traders choose this approach to avoid dealing with the software directly.

Sources

• GOV.UK: Use Making Tax Digital for Income Tax
• GOV.UK: Sign up your business for Making Tax Digital for Income Tax
• GOV.UK: Cash basis accounting for sole traders
• GOV.UK: Making Tax Digital for Income Tax Self Assessment legislation overview