Making Tax Digital for Sole Traders: The Complete Beginner's Guide

You'll learn:

• what Making Tax Digital means
• who it applies to
• when different sole traders need to use it
• what qualifying income means
• what quarterly updates are
• what records you need to keep
• what MTD-compatible software does
• how to prepare without panic

Quick answer

Making Tax Digital, often called MTD, is HMRC's system for keeping business records digitally and sending tax information online using compatible software.

For sole traders, the biggest change is not the tax itself. It is how you keep records and report information to HMRC.

If MTD for Income Tax applies to you, you will need to:

• keep digital records of your business income and expenses
• use MTD-compatible software
• send quarterly updates to HMRC
• finalise your tax position at the end of the year

MTD for Income Tax is being introduced in stages. It started from 6 April 2026 for eligible sole traders and landlords with qualifying income over £50,000. Later phases apply to people with qualifying income over £30,000 and £20,000.

What is Making Tax Digital?

Making Tax Digital is HMRC's move towards digital tax records and online reporting.

For sole traders, this means keeping records of your business income and expenses in digital form and using compatible software to send information to HMRC.

Before MTD, many sole traders only dealt with their tax records properly once a year when completing Self Assessment.

Under MTD, record keeping becomes more regular.

Instead of waiting until the end of the tax year, you keep your records updated throughout the year and send summary information to HMRC at set points.

Why did HMRC introduce Making Tax Digital?

HMRC introduced Making Tax Digital to make tax administration more effective, efficient and easier to get right.

The idea is simple: if records are kept digitally and updated regularly, there is less chance of mistakes caused by missing receipts, forgotten income, manual copying or last-minute admin.

For sole traders, that can also make tax feel less stressful.

You are not trying to rebuild a whole year from bank statements, screenshots, receipts, emails and memory. You are keeping things organised as you go.

What changes under Making Tax Digital?

If MTD applies to you, these things change:

• you keep digital business records
• you use compatible software
• you send quarterly updates to HMRC
• you finalise your tax position at the end of the year through software
• record keeping becomes an ongoing habit, not a once-a-year panic

These things do not change:

• MTD does not create a new tax
• it does not change Income Tax rates
• it does not stop you claiming allowable business expenses
• it does not remove your responsibility to keep accurate records
• it does not mean every sole trader joins at the same time

How Making Tax Digital works

The basic process looks like this:

1. You earn business income.
2. You record income and expenses digitally.
3. You use MTD-compatible software.
4. You send quarterly updates to HMRC.
5. You make any required adjustments.
6. You submit your tax return and pay any tax due by the normal deadline.

Who does Making Tax Digital apply to?

Making Tax Digital for Income Tax applies to some people who are already within Self Assessment.

It is mainly relevant if you are:

• a sole trader
• a self-employed freelancer
• a self-employed contractor
• a landlord with UK property income
• someone with both self-employment and property income

It does not apply to you just because you are employed.

It also does not apply to limited companies in the same way. This guide is about MTD for Income Tax, not Corporation Tax or VAT.

Does MTD apply to all sole traders?

No.

Not every sole trader has to use MTD straight away.

Whether you need to use it depends mainly on:

• whether you are registered for Self Assessment
• whether you have income from self-employment or property
• your qualifying income
• whether any exemption applies to you

Quick eligibility guide

What is qualifying income?

Qualifying income is the figure HMRC uses to decide when you need to start using MTD for Income Tax.

For most sole traders, this means looking at income from self-employment and property before expenses are deducted.

That last part matters.

Qualifying income is not the same as profit.

When does Making Tax Digital start?

Making Tax Digital for Income Tax is being introduced in stages.

The current rollout is:

These thresholds are based on qualifying income in specific tax years.

HMRC reviews Self Assessment information and may write to you if you need to use MTD. However, you should still check your own position. Do not rely only on receiving a letter.

Examples

What if your income changes?

If your income goes above a threshold, MTD may apply from a future tax year.

If you are already using MTD and your income later drops, do not assume you can stop immediately. HMRC has rules about when people can opt out.

This is an area where you should always check the latest guidance or speak to a qualified adviser.

What are quarterly updates?

Quarterly updates are summaries of your business income and expenses sent to HMRC during the tax year using MTD-compatible software.

They are not full tax returns.

They are not separate tax bills.

They are not the final calculation of what you owe.

Their purpose is to keep HMRC updated during the year based on the digital records you are already keeping.

A quarterly update usually includes

• business income
• business expenses
• summary totals from your digital records for the period

You do not usually need to make final accounting or tax adjustments before sending each quarterly update. Those adjustments come later when you finalise your tax position.

Quarterly updates are not quarterly tax returns

This is one of the most important points to understand.

A quarterly update is lighter than a tax return.

You are not completing your full tax return four times a year. You are sending summary information from your records.

Do quarterly updates mean paying tax every three months?

No, not automatically.

Quarterly updates do not, by themselves, mean you pay Income Tax every three months.

Your payment obligations still depend on HMRC's tax payment rules.

What records do sole traders need to keep?

Good records are the foundation of Making Tax Digital.

If your records are organised, MTD becomes much easier. If your records are scattered, MTD will feel more stressful than it needs to.

As a sole trader, you should keep records of:

• money you receive from customers
• business expenses
• receipts
• invoices
• dates of transactions
• amounts paid or received
• a short description of what each transaction was for

Under MTD, eligible businesses need to keep digital records of their self-employment and property income and expenses.

Good record-keeping habits

The best habit is simple: record things while they are fresh.

Try to:

• record income when you are paid
• save receipts as soon as you receive them
• take photos of paper receipts
• keep invoices in one place
• separate business and personal spending where possible
• check your records regularly
• add notes to transactions that may be unclear later

Quick record-keeping checklist

Ask yourself:

• Can I find my income records quickly?
• Can I find receipts for business expenses?
• Do I know which expenses were business and which were personal?
• Are my records digital?
• Do I update them regularly?
• Would I understand today's transactions six months from now?

If the answer is no, start there before worrying about anything more complicated.

What does MTD-compatible software mean?

MTD-compatible software is software that can work with HMRC's Making Tax Digital system.

If MTD applies to you, you use compatible software to:

• create digital records
• store digital records
• correct digital records
• send quarterly updates to HMRC
• submit your tax return
• pay any tax due by the normal deadline

HMRC sets the requirements for software, but it does not choose the product for you.

Does HMRC provide MTD software?

No.

HMRC does not provide the software for you.

You need to choose software that works with MTD for Income Tax.

What good software should help with

A good MTD-compatible tool should help you:

• record income quickly
• track expenses
• save receipts
• organise invoices
• understand your estimated tax position
• prepare quarterly updates
• reduce manual copying
• stay calmer around tax deadlines

The best tool is not always the most complicated one.

For many sole traders, the right software is the one they will actually use consistently.

Before choosing software, ask

• Is it compatible with MTD?
• Is it designed for sole traders?
• Is it easy to use without accounting knowledge?
• Can I record income and expenses quickly?
• Can I store receipts?
• Can it support quarterly updates?
• Does it help me understand my tax position?
• Is it simple enough to use every week?

Making Tax Digital vs Self Assessment

Making Tax Digital does not simply abolish Self Assessment.

A better way to understand it is this:

MTD changes how eligible sole traders do parts of Self Assessment.

You still need to finalise your tax position.

You still need to pay any tax due.

But the record keeping and reporting process becomes more digital and more regular.

Self Assessment vs Making Tax Digital

What stays the same?

• You still pay Income Tax if you owe it.
• You can still claim allowable business expenses.
• You are still responsible for accurate records.
• You still need to finalise your tax position.
• You still need to meet HMRC deadlines.

What changes?

• You keep records digitally.
• You use compatible software.
• You send quarterly updates.
• You deal with records throughout the year.
• You reduce reliance on one big annual admin session.

Myth vs fact

How to prepare for Making Tax Digital

Preparing for MTD does not mean changing everything overnight.

The best approach is to make your records easier to manage before you are under pressure.

Step 1: Check whether MTD applies to you

Start by checking:

• whether you are registered for Self Assessment
• whether you have self-employment or property income
• your qualifying income
• your likely MTD start date
• whether an exemption may apply

Do this using official HMRC guidance.

Step 2: Understand your qualifying income

Do not guess based on profit.

Look at your self-employment and property income before expenses, then check how HMRC applies the threshold rules to your circumstances.

If your income sources are mixed or your situation is unusual, speak to a qualified adviser.

Step 3: Start keeping digital records

You do not need to wait until the last minute.

Start building the habit now:

• record income digitally
• record expenses digitally
• save receipts digitally
• keep invoices organised
• update records weekly

This will make the transition much easier if MTD applies to you.

Step 4: Choose compatible software

Choose software before you need to sign up.

Look for something that fits the way you work.

If you are a sole trader with simple records, you probably do not need a complicated finance system. You need something reliable, clear and easy to keep updated.

Step 5: Learn what quarterly updates involve

Quarterly updates are much less intimidating once your records are already organised.

The aim is not to rebuild your business finances every quarter.

The aim is to send summary information from records you are already keeping.

A simple preparation timeline

Do you need an accountant for Making Tax Digital?

Not always.

Many sole traders with simple records can manage MTD using compatible software.

However, an accountant or qualified tax adviser can be helpful if:

• you are unsure what expenses you can claim
• your records are messy
• you have made mistakes in previous returns
• you want someone to check your position

Software can help you stay organised.

It does not replace personalised tax advice when your situation is complex.

Frequently asked questions

Do all sole traders need to use Making Tax Digital?

No.

MTD for Income Tax is being introduced in stages. Whether it applies to you depends on your Self Assessment status, your self-employment or property income, your qualifying income and whether any exemption applies.

What is qualifying income?

Qualifying income is the income HMRC uses to decide when you need to use MTD for Income Tax.

For many sole traders, this means income from self-employment and property before expenses are deducted.

It is not simply your final profit.

Does Making Tax Digital replace Self Assessment?

No.

MTD changes how eligible sole traders and landlords keep records and report information as part of Self Assessment.

You still need to finalise your tax position and pay any tax due.

Will I have to pay tax every three months?

No, not automatically.

Quarterly updates are summaries of income and expenses. They do not automatically mean quarterly tax payments.

Does HMRC provide MTD software?

No.

HMRC sets the requirements, but you choose compatible software yourself.

Can I still use spreadsheets?

Possibly, but only if they are used in a way that meets MTD requirements.

A spreadsheet alone may not be enough. You may need bridging software or another compatible solution.

What happens if I miss an MTD deadline?

Missing deadlines can have consequences under HMRC rules.

However, HMRC has confirmed that for people required to use MTD from 6 April 2026, penalty points will not apply for late quarterly updates in the first tax year. Penalties can still apply for late tax returns or late payment.

Always check the latest HMRC guidance before relying on this.

What if I am both self-employed and a landlord?

Both types of income can matter.

If you have income from self-employment and property, you need to check how HMRC calculates your qualifying income and when MTD applies to you.

Can I use MTD before I have to?

In some cases, yes.

Some people can sign up voluntarily before they are required to use MTD. This may help you get used to the process early, but you should check HMRC guidance before signing up.

Do I need to keep paper receipts?

MTD is based on digital records, but you should still make sure you keep enough evidence for your business transactions.

In practice, many sole traders take photos or upload digital copies of receipts so they are easier to find later.

Where can I find official guidance?

Use HMRC and GOV.UK guidance as your primary source.

Tax rules and thresholds can change, so check the latest official guidance before making decisions.

The calm way to prepare

Making Tax Digital sounds bigger than it feels once you understand the basic idea.

For most eligible sole traders, it is mainly a shift from scattered, last-minute admin to regular digital record keeping.

You do not need to become a tax expert overnight.

Start with the basics:

• know whether MTD applies to you
• understand your start date
• keep digital records
• choose compatible software
• update your records regularly
• check HMRC guidance when rules matter

That is enough to move from uncertainty to control.

How Suma fits in

Many sole traders do not struggle with tax because they are careless.

They struggle because their business information is spread across bank transactions, screenshots, receipts, invoices, spreadsheets and memory.

Suma is being built to make that everyday admin feel simpler.

The aim is to help UK sole traders and landlords track expenses, understand their estimated tax position and prepare for Making Tax Digital without relying on messy spreadsheets or last-minute panic.

If you would like a calmer way to prepare for MTD, you can join the Suma early access list below and we will let you know when it is ready.

Before you go

Before making any tax decision:

• check the latest HMRC guidance
• confirm the current thresholds and dates
• make sure the rules apply to your circumstances
• speak to a qualified tax adviser if you are unsure

Sources

This guide is based on official HMRC and GOV.UK guidance on Making Tax Digital for Income Tax, qualifying income, compatible software, quarterly updates and signing up for the service:

• Use Making Tax Digital for Income Tax
• Check if you need to use Making Tax Digital for Income Tax
• Sign up for Making Tax Digital for Income Tax
• Find compatible software
• Self Assessment tax returns