From annual returns to quarterly updates: MTD for sole traders

MTD for Income Tax, which goes live from April 2026, is the most significant change to the self-assessment system in decades.

Sole traders have been used to submitting a single annual tax return, but the new system changes the frequency of reporting, as well as how you store your financial data.

Despite the name, the upcoming changes aren’t simply about digitising your tax and accounting records.

MTD will change how often information is stored and submitted, and how HMRC analyses your business data throughout the year.

Who is affected by the new MTD rules?

Making Tax Digital for Income Tax applies to self-employed people and landlords with qualifying income above specified thresholds.

• From April 2026, it will become mandatory for those earning over £50,000.
• From April 2027, the threshold drops to £30,000.

And, significantly, the income figure is based on gross turnover, not profit.

According to the ICAEW, around 860,000 people are included in the initial April 2026 launch, 1.1m from April 2027, and around 980,000 more from April 2028.

Here is the official step-by-step guide.

If your income is below these thresholds, you don’t need to register yet, but some people may choose to do so voluntarily.

What changes under MTD for Income Tax?

Currently, most sole traders submit a single Self Assessment tax return each year. This has to be completed by the end of January following the tax year in question.

Making Tax Digital replaces that single annual submission with a series of quarterly digital updates.

Under the new system, you will need to:

• Keep digital records of income and expenses.
• Use HMRC-compatible software (e.g. Xero, FreeAgent).
• Submit quarterly updates to HMRC.
• Submit an End of Period Statement after the tax year ends.
• Submit a final declaration confirming your total tax position.

The quarterly update reports totals for income and expenses. They do not influence your tax bill, but they do give HMRC a regular view of how your business is performing.

Read this official guide on signing up and using the new system, plus ByteStart’s guide to registering.

You don’t need to start paying tax every quarter

One common misunderstanding is that quarterly updates mean paying income tax four times a year.

That is not how the system works: MTD means you must report your figures quarterly, but you still pay any tax liabilities only once per year. The updates supply information to HMRC.

Your tax is still calculated at year-end; however, HMRC may show estimated figures based on the data submitted, which some people find confusing or worrying.

Keeping digital records will now be mandatory

Under MTD, as the name suggests, you must keep digital tax records.

This means recording income and expenses in compatible software such as Xero or FreeAgent, rather than relying on spreadsheets or paper records alone.

Accounting software has been a game-changer in recent years, but the data in your account is only as accurate as the information you enter. You are always responsible for the accuracy of the data you submit.

Read our overview of what records a sole trader is expected to keep and how accounts typically work, in simple terms:

Why should I be concerned?

For many self-employed people, the most significant change is not necessarily the technology but the frequency of updates.

Submitting information four times a year reduces the opportunity to make informal corrections during the tax year.

Mistakes that might previously have been spotted and fixed before filing can now appear repeatedly across quarterly updates. While corrections are still possible, they take more time and attention.

This makes good record-keeping and regular review more crucial than before.

A new penalty system if you get things wrong

As you might expect, alongside the new MTD reporting requirement, HMRC has also introduced a new penalty system for failing to file on time or submitting inaccurate data.

The system is designed to encourage people to report regularly rather than the one-off annual filing we’re all currently used to.

For busy small business owners juggling work, admin, and the cost-of-living crisis, it’s easy to miss deadlines, especially when you haven’t put processes in place to manage MTD.

Preparing for the change  – an accountant’s view

Even if your turnover is below £50,000 and you don’t have to comply with MTD until April 2026, you will likely need to do so eventually, so now is a great time to prepare.

Small business specialists, Integro Accounting recommend following these initial steps:

• Read up on what MTD involves, if and when you need to comply.
• Research accounting software options; Xero and FreeAgent are good bets.
• Consider hiring an accountant who can help you not only with your MTD needs, but also with all sorts of other tax duties.

Making Tax Digital for Income Tax is not a minor change; it’s a significant one that will affect most small business owners in the UK at some point.

Talk to an accountant if you have any questions about MTD, how it works, when you need to join, and what to do if you encounter problems along the way.