Starting in April 2026, sole traders whose yearly revenue (sales, not profit) exceeds £50,000 must adhere to Making Tax Digital (MTD) rules and keep digital records using compatible online software. If you receive income from both self-employment and rental sources, compliance is necessary if your total income exceeds £50,000.
Everything Sole Traders Need To Know About MTD
HMRC’s Making Tax Digital initiative aims to replace self-assessment tax returns with online tax management software. Currently, VAT-registered businesses must use MTD-compliant software to keep digital records and submit their VAT returns to HMRC. However, sole traders and landlords should be aware that MTD for income tax is also being gradually introduced. If you want to understand how the MTD program affects sole traders and landlords, we have compiled a detailed guide. Keep reading to learn about important deadlines, income thresholds, and frequently asked questions regarding MTD for Income Tax Self-Assessment (ITSA).
- MTD For Income Tax Self Assessment
- Do Sole Traders Have To Keep Digital Records?
- Do Sole Traders Get Audited By HMRC?
- What Is The Qualifying Income For MTD?
- I Already Use Accounting Software – Is It MTD Compliant?
MTD For Income Tax Self Assessment
On the 6th of April 2026, the MTD regulations will apply to income tax. Sole traders and landlords whose annual earnings exceed £50,000 must register before the specified deadline. Those earning more than £30,000 will be required to register starting in April 2027. Before signing up for MTD for ITSA, you must have HMRC-recognised software, as you need to register through your cloud-based software, not the HMRC website.
It will also be necessary to submit a summary of income and expenses to HMRC every quarter and a final declaration for all other taxable income, including investments and interest earned on savings.
You may apply for an exemption from MTD if you have a valid justification, such as a poor broadband connection or a disability that makes using a computer difficult. While you undergo the application process, compliance with MTD regulations is not required. However, the process for claiming exemption has not yet been confirmed by HMRC.
Do Sole Traders Have To Keep Digital Records?
Under the MTD initiative, sole traders must keep digital records. MTD for income tax is being rolled out gradually for the self-employed, with one of the key requirements being the use of compatible online software to manage and maintain digital business records. This indicates that sole traders will need to use software that is compatible with MTD to track their income, expenses, and other relevant financial details. The records should be stored in a digital format, easily accessible, and able to be submitted to HMRC when necessary.
Do Sole Traders Get Audited By HMRC?
HMRC has the authority to audit sole traders. They can conduct audits and investigations to ensure compliance with tax laws and regulations. Audits may be performed randomly or triggered by specific reasons, such as discrepancies in tax returns or unusual financial activities. During an audit, HMRC may request to review a sole trader’s financial documents, including income, expenses, and other relevant records, to verify the accuracy of their tax filings. Sole traders are required to keep accurate and up-to-date records to support their tax returns and to be prepared for potential audits.
You should have a dedicated business bank account for your sole trader or rental business so that HMRC cannot scrutinise or question personal transactions. It can be difficult to prove that personal income is not unreported business income, as most people don’t maintain accurate records of their personal transactions.
What Is The Qualifying Income For MTD?
In April 2026, the threshold for income qualification will be set at £50,000 or more annually. If your income as a sole trader surpasses £50,000, you must adhere to the MTD regulations and maintain digital records using compatible online software. For landlords, the income qualification threshold is also £50,000 or more annually from rental earnings before allowable expenses are deducted.
Starting in April 2027, the threshold will decrease to £30,000 or more annually. It’s essential to remember that these thresholds may change, so staying informed with the latest updates from HMRC is advisable.
There are no plans to change the payment dates of the 31st of January and 31st of July each year. However, following HMRC’s move from annual to quarterly filing of financial information, this could be a possibility in the future.
I Already Use Accounting Software – Is It MTD Compliant?
You can use the HMRC MTD website to see whether your software is MTD VAT compliant. These will likely ultimately be MTD ITSA compliant, but it is worth checking with your software provider or accountant.
Making Tax Digital Support
At Digital Tax Matters, we can help you comply with the MTD regulations. We offer assistance in selecting and implementing digital accounting systems, provide training and ongoing support, conduct compliance checks, and ensure accurate quarterly reporting. Many of our clients choose to outsource their digital bookkeeping to us.
You’ll need to take two steps to prepare for the changes which come into force on the 1st of April 2026:
- Use software to allow a seamless exchange of information with us:
We have conducted research across a number of software providers, and we advise the best and most efficient software to help you Comply is ‘Dext Solo’. This allows you to keep a record of your receipts through the APP, and we can assist you in setting up a live bank feed. The combination of both will result in a seamless exchange of your data. We can then make the quarterly filing arrangements on your behalf. The cost for this software is £4 per month. - Set up a separate business account for business use only (includes rental income and sole traders):
If you are currently using your personal account for business transactions, we advise you to set up a separate account for business use only. This will ensure the transactions being pulled through with the live feed capture business transactions only. This will help keep your accountancy fees as low as possible and allow us to report the quarterly figures as efficiently as possible.
Please contact us and discuss this in further detail with your account manager. You can get in touch with us as a new client or for general enquiries via 01234 357595 or office@digitaltaxmatters.co.uk.