Making Tax Digital for sole traders and the self-employed

You must use Making Tax Digital for Income Tax if you are registered for Self Assessment, you have self-employment income, property income or both, and your qualifying income is more than the threshold for the tax year. Partnerships do not use MTD yet, and your share of partnership profit does not count towards the threshold.

HMRC tests each start date using the tax return you sent for an earlier year, as the table shows. It writes to you if you are over the threshold. If no letter arrives, it is still your responsibility to check.

If your qualifying income is £20,000 or less, you are automatically exempt and send a Self Assessment return as normal. You also send a normal Self Assessment return for the tax year before you start MTD.

Turnover. Qualifying income is your total self-employment and property income before expenses, taken from the earlier tax return HMRC is testing. A sole trader with £55,000 of sales and £20,000 of costs has £55,000 of qualifying income, not £35,000.

Income from more than one business is added together, and so is any rental income. Employment income, dividends (including from your own company), the State Pension and private pensions do not count.

If your accounting period was shorter or longer than a year, HMRC annualises your self-employment income where it has the information. If you are VAT registered and use the cash basis, you can include or exclude VAT when you declare your income. If you include it, it counts.

MTD changes how you keep records and how often you report. It does not change how much tax you pay or when you pay it. HMRC says MTD will not change the way you pay tax or the dates that payments are due.

You keep digital records for each business during the year, send four quarterly updates for each business and then submit your tax return through the same kind of software. The income and expense categories are the same ones you know from the self-employment pages of the Self Assessment return (SA103).

You keep one set of digital records for each self-employment business, and send a separate quarterly update for each. HMRC’s own example is someone who works as an electrician and as a driving instructor, who keeps two sets of records.

If you also let property, your property income is a separate business with its own update. All your UK lets count as one UK property business.

Every update shares the same deadline. If several are late on the same deadline, you only get one penalty point for that deadline.

A digital record is a record of an income or expense, created and stored in software that works with MTD. Each record needs the amount, the date and a category. Record your sales, takings and fees, and your business expenses, such as stock, travel, office and financial costs.

If you are a retailer, you can record your daily gross takings instead of each sale. If a cost is partly private, you can record only the business part, record the business and private parts separately, or record the total and adjust the category total later.

If you are sure you will use simplified expenses, such as the flat rate for working from home, you do not need records of the actual costs. If you are not sure, record everything. You still keep original documents such as invoices and bank statements, or copies of them.

A self-employment quarterly update has two income lines, turnover and other business income, and 13 expense categories. These are the categories HMRC lists in its quarterly update notice.

If the turnover of a business is less than £90,000, HMRC allows what it calls simpler categorisation. You only record whether each transaction is income or an expense, and your update sends total income and total expenses. The test is for each income source, so each business must be under £90,000 on its own.

If turnover reaches £90,000, you must put all the records for that business into full categories before your next update. That covers records from the start of that tax year and for the following year. If you are not sure whether you will reach £90,000, HMRC says to use full categories from the start.

Business entertainment has its own category, but client entertaining is usually not an allowable expense. The part you cannot claim is taken out at year end as a tax adjustment.

• Cost of goods
• Payments to subcontractors in the construction industry
• Wages
• Car, van and travel
• Rent, rates, power and insurance
• Repairs
• Phone, fax, stationery and office
• Advertising
• Business entertainment costs
• Interest on loans
• Bank and financial charges
• Professional fees
• Other expenses

HMRC’s standard update periods follow the tax year. Each update covers the tax year to date, so the second update covers 6 April to 5 October. If your accounting period runs from 1 April to 31 March, you can choose calendar periods instead, but only before you send your first update of the year. The deadlines are the same.

You can send an update any time after the period ends, up to and including the deadline day. You can also send up to 10 days before the period ends if you do not expect any more transactions. If nothing happened in a period, you still send a nil update.

Your own deadlines come from HMRC and show in your software and your HMRC online account. For people who started in April 2026, HMRC lists them as 7 August 2026, 7 November 2026, 7 February 2027 and 7 May 2027.

Here is how cumulative updates work for a fictional mobile hairdresser using standard update periods. Each update repeats the year so far, so a mistake in one quarter is put right in the next.

In her first quarter she forgot a £500 payment from a client. She adds it to her records in July, and it is included in her second update automatically. She does not need to send the first update again.

After your fourth update, you make year-end adjustments in your software. They include allowances such as the trading allowance, removing costs you cannot claim, and capital allowances. The cash basis is the default for sole traders. If you use traditional accounting instead, you also adjust for prepayments and accruals.

You also add other income before you submit. HMRC adds some itself, such as PAYE employment income, pensions and CIS deductions. You add things like savings interest, dividends and your partnership share.

Then you submit your tax return through your MTD software by 31 January after the tax year ends. HMRC calls the tax return under MTD the final declaration. You can change it within 12 months of the deadline. You cannot claim a refund in the MTD tax return, so you ask through your HMRC online account instead.

You pay as before. Payments on account are two instalments, each half of last year’s tax, due by 31 January and 31 July. You do not make them if last year’s tax was less than £1,000, or if more than 80% of it was paid outside Self Assessment. Any balancing payment is due by 31 January the following year.

Most mistakes come from treating MTD as a new tax rather than a new way of reporting. These are the ones that catch people out.

Each one is easy to avoid once you know the rule, and corrections during the year go into your next update.

• Using profit instead of turnover to check the threshold
• Keeping one set of records for two different trades
• Treating a quarterly update as a tax bill and paying four times a year
• Retyping totals from a spreadsheet instead of uploading the file
• Skipping a nil update in a quiet quarter
• Holding back an update to make tax adjustments first, which HMRC does not require

SimpleTaxFlow is MTD for Income Tax software for sole traders and landlords. You can keep your spreadsheet and upload totals for the tax year so far, or record income and expenses in Bookkeeping, where bookkeeping is free.

In each quarterly update you answer the turnover question once for the business and tax year. Simple sends one expenses total and Detailed uses HMRC’s expense categories. You check the figures HMRC will receive before you send, see HMRC’s tax calculation afterwards and submit your tax return at year end.

Tax rules can change and your circumstances matter. Use HMRC’s current guidance to confirm what applies to you.