Using Xero for Making Tax Digital (MTD for Income Tax) as a sole trader

Xero is one of the most widely used accounting software platforms in the UK.

We look at how Xero is used in practice for MTD for Income Tax, and whether it is a sensible option for sole traders and landlords preparing for the changes.

What does Making Tax Digital for Income Tax require?

Under MTD for Income Tax, HMRC expects self-employed people to follow a different reporting process from the current Self Assessment system.

• Business income and allowable expenses must be recorded digitally.
• Summary updates must be sent to HMRC during the tax year.
• A final declaration must be submitted after the end of the tax year.

These updates must be submitted using compatible software.

Paper records are insufficient, and spreadsheets alone usually do not meet submission requirements. If you are unsure whether you need to join MTD, see our step-by-step guide on registering for MTD for Income Tax.

Is Xero recognised by HMRC for MTD?

Yes. Xero is recognised by HMRC as compatible software for Making Tax Digital for Income Tax. This means it can be used to keep digital records and submit the required MTD updates directly to HMRC.

In practice, Xero can support the full MTD process for sole traders, including digital record-keeping, quarterly updates, and end-of-year submissions. You do not need separate bridging software when using Xero for MTD for Income Tax.

How Xero fits into the MTD reporting process

Xero acts as the system where your business records are created and stored. Those records are then used to generate the updates that are sent to HMRC under MTD.

Digital record keeping

MTD requires you to keep your business records digitally rather than reconstructing them at the end of the year. In Xero, income and expenses are recorded as they occur.

Many self-employed users connect Xero to their business bank account. This allows transactions to be imported automatically and categorised, helping to keep records up to date throughout the year.

Quarterly updates to HMRC

Under MTD for Income Tax, you will normally send four summary updates during the tax year. These updates are not tax bills and do not finalise your tax position. They are snapshots based on the records you have maintained to date.

Xero allows you to submit these updates directly to HMRC using the figures in your accounting records. There is no need to re-enter totals manually into HMRC’s systems.

End of period and final declaration

After the tax year ends, you still need to review your records, make any required adjustments, and confirm your final figures. Xero supports this by maintaining a complete digital record of the year, including any changes you or your accountant make.

What Xero does and does not do under MTD

It is important to understand what the accounting software handles and what remains your responsibility.

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• Xero records and summarises your business income and expenses.
• Xero submits MTD updates and declarations using HMRC’s digital system.
• HMRC calculates the actual tax due based on your submissions.
• You are responsible for ensuring records are complete and accurate.

The quarterly updates are not a replacement for the final tax calculation. The year-end process is still carried out, where you can make any final adjustments and account for any allowances and reliefs.

Using Xero instead of spreadsheets

Many sole traders currently use spreadsheets like Excel or Google Sheets to track income and expenses. While spreadsheets can still be used alongside software, they are rarely sufficient on their own under the new MTD rules.

The main issue is how to submit your data digitally to HMRC. Spreadsheet software rarely connects directly, which means you’d need to use some kind of bridging software, which actually complicates your life rather than making it simpler.

Using accounting software such as Xero avoids this extra step and keeps records and submissions in one place.

We explore this in more detail here: Should you use accounting software or stick with spreadsheets?

Is Xero suitable for me?

Xero is often suitable for sole traders who want a structured accounting system and expect their business to grow or become more complex over time. It is also widely used by accountants, which makes life a lot easier.

However, Xero is not the only MTD-compatible option. Some businesses may prefer simpler tools depending on how they trade. You can compare alternatives in our guide to accounting software for self-employed people.

Do you still need an accountant if you use Xero?

Using Xero does not relieve you of your legal responsibility for your tax affairs. Most self-employed people continue to use their accountant as usual for tax advice and other services.

In fact, if you already have an accountant, you’re probably already using some kind of accounting software.

Xero can make the accounting process much more efficient, but it can never replace professional judgement. We look at this question in more detail here: Do you still need an accountant if you use Xero?

Getting started with Xero for MTD

If you decide to use Xero for MTD, it is sensible to set it up before your commencement date – whether this is from April 2026 or in a future tax year.

This allows time to understand how records are entered and reviewed.

You can view Xero’s current plans and options via our partner link here: Find out more about Xero. ByteStart users can get 90% off their first 6 months’ fees.

Before you sign up, check that the plan you choose is sufficient for your other needs. For most sole traders, the Ignite or Grow plans cover everything you need from invoicing to MTD submissions and VAT (if you’re registered). It depends on how many transactions you expect to process each month.