The world of tax is changing for sole traders and landlords across the UK, with Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA) on the horizon. If you’re a creative entrepreneur, small business owner, or property landlord, understanding these changes now will help you prepare for a smoother transition when they come into effect.
What is Making Tax Digital for Income Tax?
Making Tax Digital is HMRC’s ambitious initiative to modernise the UK tax system by moving it online. This years-long programme aims to make tax administration more efficient, effective, and easier for taxpayers to get their tax right the first time.
For sole traders and landlords, MTD for Income Tax will replace the current annual Self-Assessment tax return with a new digital system requiring:
- Digital record-keeping using MTD-compatible software
- Quarterly updates sent to HMRC
- An end-of-period statement finalising business income
- A final declaration confirming all income sources
When will Making Tax Digital for Income Tax affect me?
HMRC is implementing MTD for Income Tax in phases based on income thresholds:
- From April 2026: Sole traders and landlords with combined gross income above £50,000 from self-employment or property
- From April 2027: Those with combined gross income above £30,000
For those below these thresholds, mandatory adoption dates have not yet been confirmed, though HMRC has indicated those with income above £20,000 will need to join at a later date.
If you’re unsure whether you’ll need to comply, HMRC will review your Self-Assessment tax return and notify you if you need to start using MTD for Income Tax.
How will Making Tax Digital change my tax reporting?
The biggest change will be the move from annual to quarterly reporting. Instead of scrambling to gather receipts and complete your tax return each January, you’ll:
- Keep digital records throughout the tax year
- Submit simplified quarterly updates within one month of each quarter end
- Submit an end-of-period statement after the tax year ends
- Make a final declaration confirming all income sources
The quarterly updates won’t require complex accounting adjustments – they’re simply a summary of your business transactions. The system aims to provide a clearer picture of your tax position throughout the year, helping you avoid the stress of last-minute tax calculations.
What software will I need for Making Tax Digital?
You’ll need MTD-compatible software to comply with the new requirements. This can be:
- A complete accounting software package such as Xero
- A combination of software and spreadsheets with digital links
- An agent using compatible software on your behalf (aka your accountant)
Many cloud accounting providers like Xero, FreeAgent and QuickBooks are developing MTD-compliant solutions.
The software must be able to:
- Record and store digital records
- Submit information to HMRC via their API platform
- Receive information from HMRC about your tax obligations
Can I be exempt from Making Tax Digital for Income Tax?
Some individuals may qualify for exemption from MTD for Income Tax. You may be automatically exempt if:
- Your business or property is run entirely by practising members of religious societies whose beliefs prevent them from using computers
- It’s not reasonably practical for you to use digital tools due to age, disability, remoteness of location, or other valid reasons
HMRC plans to open applications for exemptions from October 2025, but the exact process hasn’t been confirmed yet.
How can I prepare for Making Tax Digital now?
While 2026 might seem distant, there are practical steps you can take now:
- Assess your current record-keeping: If you’re still using paper records or basic spreadsheets, consider transitioning to digital methods sooner rather than later.
- Explore MTD-compatible software: Start researching options that suit your business needs. Many providers offer free trials.
- Consider joining the pilot programme: HMRC has expanded its MTD for Income Tax pilot, allowing eligible businesses to test the system voluntarily before it’s mandatory.
- Talk to your accountant: Professional guidance can help you prepare efficiently for the transition.
Will Making Tax Digital benefit my business?
While change can be challenging, MTD aims to deliver several benefits:
- More accurate tax returns with fewer errors
- A clearer view of your tax liabilities throughout the year
- Reduced time spent gathering information at year-end
- Improved business insights through digital record-keeping
Don’t struggle on your own. Get our expert help with Making Tax Digital
We love supporting creative entrepreneurs, small business owners, and property landlords with everything finance and tax related. We can help you select appropriate software, establish efficient digital record-keeping, and ensure you’re fully prepared for MTD for Income Tax.
If you’d like to discuss how Making Tax Digital (ITSA) will affect your specific situation, chat to us by calling 0208 446 8100 or complete our online form to book a discovery meeting.
