Making Tax Digital for Tradespeople UK — What You Need to Know (2026)

If you're a self-employed tradesperson in the UK, Making Tax Digital (MTD) is the biggest change to how you deal with HMRC in a generation. The government is phasing out paper and manual online tax filing and replacing it with a mandatory digital system — and if you're not already on it for VAT, you're likely non-compliant. If you earn over £50,000 as a sole trader, the next phase lands in April 2026. Here's everything you need to know.

What is Making Tax Digital?

Making Tax Digital is HMRC's programme to move UK tax records and filings entirely to digital systems. The idea is straightforward: instead of completing tax returns manually from memory and paper records at year end, you keep your financial records digitally throughout the year and submit directly to HMRC via software. HMRC gets more accurate, real-time data; you get a clearer picture of your tax position throughout the year rather than a nasty surprise in January.

There are two phases of MTD that are directly relevant to tradespeople: MTD for VAT (already live and mandatory) and MTD for Income Tax Self Assessment (rolling out from April 2026). Limited companies have a separate MTD timeline that HMRC has not yet confirmed.

MTD for VAT — already mandatory

MTD for VAT has been in force since April 2019 for businesses above the VAT threshold, and since April 2022 for all VAT-registered businesses regardless of turnover. If your taxable turnover exceeds the VAT registration threshold (£90,000 in 2024/25), you are required to:

• Keep digital records of all VAT transactions — sales, purchases, and VAT amounts — in MTD-compatible software
• Submit your VAT returns to HMRC directly from that software via HMRC's API
• Never manually type VAT figures into HMRC's old online portal — that route is no longer available under MTD

If you've been VAT-registered since April 2019 and are above the threshold, you should already be doing this. If you signed up for VAT voluntarily and your turnover is below the threshold, you were brought into MTD for VAT from April 2022. Popular MTD-compatible software includes Xero, QuickBooks, FreeAgent and Sage — all support direct VAT submission to HMRC.

If you're still logging into the old HMRC VAT portal and typing in your figures manually, stop immediately — you are non-compliant and at risk of penalties. Switch to MTD-compatible software and submit from there.

MTD for Income Tax Self Assessment (ITSA)

MTD for ITSA is the bigger change — and the one that affects sole traders who may not be VAT-registered at all. It replaces the annual Self Assessment tax return with a continuous digital reporting system. The rollout is staggered by income level:

• April 2026 — sole traders and landlords with total income over £50,000 must join MTD for ITSA
• April 2027 — extended to sole traders and landlords with income over £30,000
• 2028 onwards — HMRC will confirm the threshold for further expansion; the direction of travel is toward bringing in all sole traders eventually

The Self Assessment return as we know it — one filing per year, due by 31 January — is being replaced by a continuous reporting process. This is a fundamental shift in how tradespeople manage their tax affairs.

What MTD for ITSA means in practice

Under MTD for ITSA, instead of filing one annual tax return by 31 January, you will submit four quarterly updates throughout the year plus a final end-of-period statement. Here's how the calendar looks:

• Quarterly updates — summaries of your income and expenses for the quarter, submitted digitally within one month of each quarter end. These are not tax returns — they're running totals that keep HMRC up to date
• End-of-period statement — submitted after the tax year ends, this is where you confirm the full-year figures, claim reliefs and allowances, and finalise your taxable profit
• Final declaration — replaces the old Self Assessment return, confirming all your income sources for the year and agreeing your tax bill

For many sole traders who currently do everything in one sitting in January, this represents a significant change in working practices. The upside is that you'll have a much clearer picture of your tax position throughout the year — no more January shock. The downside is that you can no longer ignore your books for 10 months and catch up in a panic.

Who is affected

MTD for ITSA applies to sole traders and landlords. If you operate as a limited company, MTD for Income Tax does not apply to you — limited companies have a separate MTD timeline which HMRC has not yet confirmed. If you run as a sole trader and your total income (from all sources, including rental income) exceeds the relevant threshold, you're in scope.

If your income is currently below the threshold, you're not required to join MTD for ITSA yet — but you can voluntarily sign up early to get comfortable with the system before it becomes mandatory. Many accountants recommend this for clients approaching the threshold, particularly those whose income fluctuates.

Partnerships are not included in the current MTD for ITSA rollout. HMRC will announce a separate timeline for partnerships.

What software you need

Both MTD for VAT and MTD for ITSA require HMRC-approved compatible software that can submit data directly to HMRC via the API. HMRC maintains a current list of approved software at gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-income-tax. Popular options include:

• Xero — cloud-based, strong bank feeds, supports both MTD for VAT and MTD for ITSA. Well suited to tradespeople with employees or subcontractors
• QuickBooks — widely used, good mobile app, supports MTD for VAT and ITSA. Strong on invoicing and expense tracking
• FreeAgent — popular with sole traders and freelancers, straightforward interface, MTD-compatible for both VAT and ITSA. Free with certain business bank accounts
• Sage — established option, good for those with more complex needs, MTD-compatible across the range
• Coconut — designed specifically for sole traders, simpler interface, built with MTD in mind

The software must be able to submit data directly to HMRC via the API. You cannot use a plain spreadsheet for MTD unless it connects via bridging software (see below). If you currently use a notebook or a basic spreadsheet, you need to make the move to proper accounting software.

Bridging software

If you currently manage your records in a spreadsheet and don't want to abandon it entirely, bridging software can act as a connector between your spreadsheet and HMRC's API. Examples include Absolute VAT Filer and DataDear. Your spreadsheet data flows through the bridging tool and is submitted to HMRC digitally.

This is a valid solution, but most accountants regard it as a temporary one. Bridging software adds an extra step, introduces more opportunity for error, and doesn't give you the real-time financial visibility that proper accounting software does. If you're going to be in MTD for the long term — and you are — moving to dedicated accounting software is the better investment.

Digital record-keeping requirements

MTD requires you to keep digital records of every transaction — every invoice raised, every expense incurred. Critically, records must be kept digitally from the source. You can photograph a paper receipt and upload it; what you cannot do is keep paper records and then re-enter the totals digitally at the end of the month. HMRC considers that transcription, and it does not satisfy the MTD digital record-keeping requirement.

In practice this means your workflow needs to be:

• Raise invoices digitally in your accounting software (not in Word or on paper)
• Photograph receipts immediately and upload them — apps like Dext and Hubdoc make this easy, extracting the key data automatically and pushing it to your accounting software
• Connect your business bank account to your accounting software via a bank feed so transactions import automatically

None of this is technically difficult. The challenge is changing habits. Getting into the routine of capturing expenses digitally the moment they happen — rather than accumulating paper at the bottom of your van — is the single most important behavioural change MTD requires.

What to do now

The steps you need to take depend on where you currently are:

• If you're VAT-registered: Check that you are submitting VAT returns via MTD-compatible software and not via the old HMRC portal. If you're not, switch software immediately and notify your accountant.
• If your income is over £50,000 and you're a sole trader: MTD for ITSA applies from April 2026. You need to be using HMRC-approved software and have digital records in place before then. Talk to your accountant now about which software to use and how to migrate your records.
• If your income is between £30,000 and £50,000: You have until April 2027, but starting the transition now gives you a year to get comfortable rather than rushing to comply.
• If your income is under £30,000: No mandatory requirement yet, but HMRC's direction of travel is clear. Moving to digital bookkeeping now is sound practice regardless of the deadline.

Penalties for non-compliance

HMRC is introducing a new points-based penalty system for MTD for ITSA, similar in concept to driving licence penalty points. Each late submission earns a penalty point. Once you accumulate enough points, you face a financial penalty. The threshold varies by how frequently you submit (quarterly filers need to reach 4 points before a penalty applies).

The system is designed to be more forgiving of occasional lateness while being firm on persistent non-compliance. A single missed quarterly update won't immediately cost you money. But missing multiple submissions in a row will. Points can be wiped after a period of compliance.

Separate from the points system, HMRC can also issue penalties for failure to keep digital records, failure to use MTD-compatible software, or deliberate circumvention of the MTD rules. These are assessed on a case-by-case basis rather than automatically.

The key message: the penalty system rewards consistency. File your quarterly updates on time, every time, and you'll accumulate no points and pay no penalties. Leave it to the last minute or miss deadlines and the points stack up fast.