Making Tax Digital for sole traders: Do the rules apply to you?

Making Tax Digital has already changed how VAT works. Now, income tax is moving in the same direction – which leaves many sole traders asking a simple but important question: do the rules actually apply to me?

Under the current rules, Making Tax Digital for Income Tax will affect sole traders and landlords whose total gross income from self-employment and property business (including gross rental income) exceeds certain thresholds, making it essential to understand the new MTD for Income Tax software and quarterly submission requirements. The requirements will be introduced in three phases based on total gross income. The start date for mandatory compliance is 6 April 2026 for those with annual gross income above £50,000 from self-employment and property letting. From April 2027, the threshold lowers to £30,000, and from April 2028, it will be £20,000. Those with annual gross income of £20,000 or less from self-employment and property letting are not required to comply with Making Tax Digital.

So, what does making tax digital mean for sole traders, and how will it affect the way you manage your tax affairs?

What Making Tax Digital means in practice

Making Tax Digital is a UK government initiative designed to modernise the tax system. In practical terms, that means moving away from paper records and manual submissions towards digital records, digital tools, and direct interaction with HMRC systems.

For sole traders, this represents a gradual shift away from the current self assessment system. The existing self assessment system remains in place for those below the threshold until they are required to transition to Making Tax Digital. Instead of relying solely on one annual tax return at the end of the tax year, income and expenses are recorded digitally throughout the year and shared with HMRC on a more regular basis.

That doesn’t mean income tax rules are changing overnight – but it does change how financial data is collected, stored, and submitted. Under the new digital record keeping requirements, businesses must use HMRC-recognised MTD-compatible software for VAT and Income Tax to maintain digital records of income and expenses.

The digital tax return will be submitted electronically through compatible software, replacing the traditional paper-based process.

Does MTD for income tax apply to all sole traders?

No – and this is where much of the confusion comes from.

Making Tax Digital for income tax is based on qualifying income, not simply on being self employed. HMRC looks at total qualifying income from self employment and property income, specifically measuring business income and property income before the deduction of expenses. This means the taxable income relevant for MTD thresholds is calculated as gross income, not profit.

That distinction matters. A sole trader with PAYE income and a small side business may fall outside the rules, while someone with rental income alone may fall within scope.

Income taxed at source, such as PAYE income, savings interest, or bank interest, does not count towards qualifying income. What matters is trading and property income combined.

How income tax reporting changes under MTD

For sole traders who are within scope, the biggest shift is how income tax information is reported during the tax year.

Digital record keeping requirements mean you must maintain business records digitally, including the amount, category, and date of income and allowable expenses, using MTD-compatible software. Individuals must keep digital records of income and expenses relating to their businesses and rental properties.

Quarterly updates must then be submitted digitally to HMRC using MTD-compatible accounting software. These updates are cumulative and submitted on a year-to-date basis, replacing earlier totals and including any corrections to previous updates. Quarterly updates do not require accounting adjustments or tax calculations; they simply report total income and allowable expenses for the quarter. The first quarterly update must be submitted by the 7th of the month following the quarter-end, and taxpayers can choose to make a ‘calendar quarters election’ to align their quarterly updates with their accounting periods.

At the end of the tax year, after submitting the final quarterly update, a period statement confirms the totals, followed by the MTD tax return. The MTD tax return is pre-populated with data from the quarterly updates and must be filed by 31 January following the end of the tax year. It allows sole traders (or their accountants) to apply accounting adjustments, declare capital expenditure, and include other income such as savings interest. It is essential to ensure your digital records are accurate and complete to avoid penalties.

So while the structure changes, the entire process still results in a complete annual view of your tax affairs.

What doesn’t change under making tax digital

Despite the shift to digital reporting, some things remain the same.

Income tax rules themselves do not change. Sole traders still pay income tax and National Insurance based on profits, personal allowances still apply, and the tax year continues to run in the same way. Corporation tax remains irrelevant for sole traders, and tax is still paid in line with existing deadlines. While the reporting process changes under Making Tax Digital, you are still legally required to pay tax by the usual due dates.

In other words, Making Tax Digital changes the process – not the principles behind paying income tax. In certain circumstances, such as if you are digitally excluded or meet exemption criteria, you can still submit a paper tax return instead of filing digitally.

Are there exemptions for sole traders?

Yes, and they’re an important part of the picture.

Your individual circumstances may qualify you for exemption from Making Tax Digital for sole traders. For example, if you are digitally excluded, lack a National Insurance number on 31 January, or have specific personal situations, you may be exempt. If you complete a paper tax return because you are digitally excluded, you can apply to HMRC for an exemption. Exemptions granted for MTD for VAT due to digital exclusion should be automatically carried over to any MTD for Income Tax requirements. You are also automatically excluded from MTD if your gross income is below the relevant thresholds.

Certain groups are exempt from MTD until a later date, including individuals required to submit residence or remittance basis tax return pages (not brought into MTD until April 2027), ministers of religion, Lloyd’s underwriters, and recipients of Married Couples’ Allowance or Blind Persons’ Allowance, who will not have to join MTD until after the current parliamentary term.

Exemptions are not always permanent, though. As new MTD rules are introduced and thresholds change, it’s worth reviewing your position regularly rather than assuming the rules will never apply. For more details on exemption criteria and processes, refer to further guidance from HMRC.

Choosing the right software as a sole trader

Once digital record keeping becomes a requirement, the choice of software matters. It is important to choose a software provider that offers MTD for Income Tax-ready solutions, as this ensures your system remains compliant. If your current provider does not support these requirements, you may need to update your software or switch to a new provider to maintain compliance and efficiency.

Some sole traders continue to use spreadsheet data alongside bridging software, while others choose cloud-based MTD software for businesses, sole traders, and landlords. This can work, provided digital links are maintained and records are kept accurately.

For others, full accounting software offers a clearer route. It supports digital record keeping from the outset, simplifies quarterly updates, and provides better visibility over cash flow and potential tax bills. It can also reduce the administrative burden that often comes with managing tax manually.

The right choice depends on how you work today – and how much you want to future-proof your tax affairs.

Why thinking ahead matters

Even if Making Tax Digital for income tax does not apply to you yet, it might do in the future.

If your income is below the trading allowance, you may not need to keep detailed records or use Making Tax Digital. Sole traders whose gross income is below the MTD threshold will continue using the existing Self Assessment system until they are required to use Making Tax Digital, and must register for MTD themselves when the time comes. Some groups, such as partnerships, will be required to use Making Tax Digital at a later date.

The self assessment system is evolving, and digital reporting is becoming the default. Small business owners and self employed individuals who understand the direction of travel now are better placed to adapt smoothly later.

The question is no longer just do the rules apply to you today? It’s whether your current record keeping will still work as the assessment system continues to change.

Making MTD simpler for sole traders

Capium’s MTD compatible software is designed to support sole traders at every stage – from keeping digital records and managing quarterly updates to submitting final declarations through HMRC’s application programming interface, as well as offering HMRC-recognised MTD for VAT software for compliant VAT submissions. It is also suitable for property owners and those running their own business, ensuring compliance for a wide range of users.

Whether you’re already within scope or planning ahead, Capium helps self employed individuals stay compliant, organised, and ready for what comes next.

Explore how Capium can support Making Tax Digital for sole traders. For further details, including MTD tools for accountants to manage client VAT and Income Tax obligations, as well as wider compliance support such as AML software and checks for accounting firms and additional AML resources and training services, visit the Capium website.