Making Tax Digital for Income Tax: What Sole Trader Tradespeople Must Do (2026)

What Is Making Tax Digital for Income Tax?

MTD for Income Tax is HMRC's replacement for the once-a-year paper-or-online Self Assessment process for the self-employed and landlords. Instead of pulling your figures together once after the tax year ends and filing a single return by 31 January, you now have to do three things on an ongoing basis:

• Keep digital records of your business income and expenses in HMRC-compatible software.
• Send four quarterly updates to HMRC during the tax year, summarising your income and expenses to date.
• Submit a final declaration after the tax year ends, which replaces the old Self Assessment tax return.

The key shift is from an annual, retrospective task to a continuous, digital one. The aim, according to HMRC, is to reduce errors and give traders a closer-to-real-time picture of their tax position. For tradespeople used to dropping a carrier bag of receipts on the accountant's desk in January, it is a meaningful change in working habits.

Who Must Comply and When — The Timeline

MTD for Income Tax is being phased in by income level. The threshold that matters is your qualifying income (explained below), and the date you are mandated depends on which band that income falls into. The table below sets out the current rollout.

So if your gross self-employment and property income was above £50,000 on your 2024–25 tax return, you are in the first wave and must follow MTD rules for the 2026–27 tax year onwards. HMRC checks the threshold against the most recent tax return it has on file before each start date. The extension to those earning over £20,000 from April 2028 has been announced by the government but the precise mechanics are still being confirmed, so treat that band as planned rather than fully settled.

How 'Qualifying Income' Is Worked Out

This trips up a lot of tradespeople, so it is worth being precise. Your qualifying income is your gross income — the total turnover, before you take off any expenses — from two sources combined:

• Self-employment income: all the money your trade brings in across the year, before materials, fuel, tools, subcontractors or any other costs.
• Property income: rent from any property you let, again gross of expenses.

Crucially, the threshold is based on gross turnover, not profit. A jobbing builder turning over £60,000 but netting only £28,000 in profit after materials and subcontractors is still over the £50,000 line and mandated from April 2026. This catches out a lot of trades with high material throughput. If you have both a trade and a rental property, you add the two gross figures together — a decorator with £40,000 of trade turnover and £12,000 of rent has £52,000 of qualifying income and is in the first wave.

Income from employment (PAYE), dividends, savings interest and most pensions does not count toward qualifying income for MTD purposes. Only self-employment and property income are in scope.

What You Actually Have to Do

1. Keep digital records

From your start date you must record each item of business income and expenditure digitally in compatible software. A spreadsheet on its own is not enough unless it is linked to HMRC via bridging software. In practice this means logging sales and purchases as you go, ideally photographing or attaching receipts, rather than reconstructing everything at year end. For most tradespeople this is the single biggest behavioural change — you need a system that captures income and costs throughout the year.

2. Send four quarterly updates

You submit a cumulative summary of your income and expenses to HMRC four times a year. These are running totals, not separate snapshots, so a later quarter can correct an earlier one. The standard quarterly periods and deadlines are:

You can elect to use calendar-quarter end dates (30 Jun, 30 Sep, 31 Dec, 31 Mar) instead, which many find tidier. Quarterly updates are summary figures only — you are not making accounting adjustments or claiming reliefs at this stage, so they are quick if your records are kept up to date.

3. Submit a final declaration

After the tax year ends you finalise your figures, make any accounting adjustments, claim allowances and reliefs, and add any other income (employment, savings, dividends). This final declaration replaces the old Self Assessment return and confirms your tax liability. The deadline stays at 31 January following the end of the tax year, and your tax payment dates are unchanged.

Which Software Qualifies?

You must use software that is recognised by HMRC as MTD-compatible. HMRC maintains a published list of approved products, and it includes mainstream accounting packages used by tradespeople — the likes of QuickBooks, Xero, FreeAgent, Sage and a number of lower-cost or free options aimed at sole traders. There are two routes:

• All-in-one software that both keeps your digital records and submits the updates directly to HMRC.
• Bridging software that connects an existing spreadsheet to HMRC, for those who want to keep recording in Excel but still meet the digital-link requirement.

Always check the current HMRC list before committing — products are added and removed, and being "cloud accounting software" does not automatically mean a product is MTD for Income Tax compatible. If you use a bookkeeper or accountant, confirm which software they will file through so you are recording in the same system.

Who Is Exempt or Can Defer?

Not everyone in scope by income has to join on the headline date. The main exemptions and deferrals are:

• Income below the threshold: if your qualifying income is at or below the current mandation level for your year, you stay on standard Self Assessment for now.
• Digital exclusion: you can apply for an exemption if it is not reasonably practicable for you to use digital tools — for example because of age, disability, location with no reliable internet, or religious grounds. This must be applied for and granted by HMRC.
• Deferred groups: HMRC has deferred certain taxpayers, including some partnerships, those who cannot get a National Insurance number, certain foster carers and a handful of other specific categories, until a later date or until rules are confirmed.

If you think an exemption applies to you, apply early and keep HMRC's decision on file — do not simply assume you are exempt and stop filing.

Penalties Under the New Points-Based System

MTD for Income Tax comes with a new, separate penalty regime for late submissions and late payments. The late submission system is points-based, designed so that occasional lapses are treated more leniently than persistent failures:

• Each time you miss a submission deadline (a quarterly update or the final declaration) you receive one penalty point.
• When you reach a points threshold — four points for quarterly MTD filers — you are charged a £200 penalty.
• A further £200 penalty applies for each subsequent missed deadline while you remain at the threshold.
• Points expire after a period of compliance, so a clean run of on-time submissions resets the slate.

Late payment of tax is penalised separately and escalates the longer the tax remains unpaid, alongside interest. The practical message is simple: build the quarterly deadlines into your calendar and treat them with the same seriousness you would a 31 January return.

Practical Steps to Get Ready Now

Even if your start date is 2027 or 2028, the traders who cope best are those who switch their habits early. Here is a sensible order of action:

• Work out your qualifying income from your most recent return so you know which wave you are in and the exact date you are mandated.
• Choose and set up compatible software now — do not wait until the week before your first quarter. Run it in parallel for a few months to get comfortable.
• Start recording digitally today. Log income and expenses as jobs complete, photograph receipts on site, and stop relying on the year-end carrier-bag method.
• Separate business banking so income and expenses are easy to identify and reconcile each quarter.
• Talk to your accountant or bookkeeper about who files the quarterly updates and the final declaration, and which software you will both use.
• Diarise the four quarterly deadlines and the 31 January final declaration so nothing slips.

Frequently Asked Questions

Does MTD for Income Tax change how much tax I pay?

No. MTD changes how and how often you report, not the amount of tax due or the rates and allowances that apply. Your payment dates — 31 January and 31 July for payments on account — are unchanged.

I'm a CIS subcontractor — does MTD still apply to me?

Yes. If you are a self-employed sole trader under the Construction Industry Scheme and your qualifying income is over the threshold, you are in scope. CIS deductions are still accounted for, but you report through the MTD quarterly updates and final declaration.

What if I trade through a limited company?

MTD for Income Tax applies to sole traders and landlords filing Self Assessment, not to limited companies. If you run a Ltd, your company pays Corporation Tax and is not affected by MTD for Income Tax — though any personal self-employment or rental income you have alongside it could be.

Can I still use a spreadsheet?

Only if it is connected to HMRC through approved bridging software that maintains a digital link. A standalone spreadsheet you type figures into and then re-key elsewhere does not meet the digital record-keeping requirement.

What happens if my income drops below the threshold?

Once you are mandated and have joined MTD, you generally stay in it even if income later falls, unless HMRC's rules provide a specific exit. Check your position with HMRC or your accountant rather than assuming a drop in turnover removes the obligation.