Making Tax Digital for Sole Traders: 2026 Rules, Thresholds and Deadlines Explained

If you're a sole trader in the UK, HMRC is changing how you report your income. It's called Making Tax Digital for Income Tax, or MTD for ITSA, and it starts rolling out from April 2026. This isn't a small tweak. It changes how often you report, what records you keep, and what software you need to use.

So here's what's actually happening, who it hits first, and why a fair few sole traders are now asking whether a limited company might suit them better.

Key Takeaways

• From April 2026, sole traders and landlords with qualifying income over £50,000 must follow Making Tax Digital for Income Tax.
• From April 2027, the threshold drops to £30,000, pulling in a lot more sole traders.
• From April 2028, the government plans to lower it again, to £20,000.
• You'll need to keep digital records and send HMRC quarterly updates, not just one return a year.
• Some sole traders are using this change as a prompt to review their business structure, including whether a limited company would suit them better.

What Is Making Tax Digital for Income Tax?

Making Tax Digital (MTD) for Income Tax is a new way of reporting self-employed and rental income to HMRC. Instead of one big tax return each January, you'll send quarterly digital updates through approved software, then a final declaration at year end.

It's the next stage of a project that started back in 2019 with VAT. HMRC's reasoning is simple: digital records mean fewer errors. The Self Assessment tax gap currently sits at around 18.5%, or £5 billion a year, and HMRC wants software to close that gap.

Who Does MTD Affect, and When?

The rollout is happening in stages, based on your qualifying income (your total turnover from self-employment and property, before expenses).

From 6 April 2026

If your qualifying income is over £50,000, you'll need to start using Making Tax Digital for Income Tax. HMRC expects around 780,000 people to fall into this group.

From 6 April 2027

The threshold drops to over £30,000. Roughly another 970,000 people are expected to join at this stage.

From 6 April 2028

The government has confirmed plans to lower the threshold again, to over £20,000 (based on income in the 2026 to 2027 tax year). This brings a much wider group of smaller sole traders and landlords into scope.

If your income sits below these thresholds, you can still sign up voluntarily, but you won't be required to.

What Does MTD Actually Change for Sole Traders?

Once you're in scope, there are three main things you'll need to do differently.

Keep digital records. Paper books and basic spreadsheets on their own won't be enough. You'll need software that can either hold your records or connect to them through bridging software.

Send quarterly updates. Instead of one annual return, you'll submit a running update to HMRC four times a year, plus a final declaration. From the tax year you join, that year-end return also has to go through MTD-compatible software rather than the usual Self Assessment Government Gateway route.

Use compatible software. HMRC isn't building its own tool. You'll need commercial software that meets its requirements, and the government has said free options should be available for the smallest, simplest businesses.

Find out more about the wider accounts filing changes here.

What Does This MTD Change Cost, and Why Does It Matter?

HMRC's own figures give a sense of the admin involved. For sole traders in the £30,000 to £50,000 band, the estimated one-off setup cost is around £350, with ongoing costs of about £110 a year. For those above £50,000, it's roughly £285 upfront and £115 a year after that.

These are estimates, not guarantees, and your actual costs will depend on your software choice, whether you use an accountant, and how digitally set up you already are.

Penalties: What Happens If I Miss a Deadline?

Making Tax Digital for Income Tax comes with its own points-based penalty system, separate from the current Self Assessment rules. Miss a quarterly update or your year-end return, and you pick up a penalty point. Reach 4 points, and you get a £200 fine, plus another £200 for every missed deadline after that. Points expire after 24 months if you stay compliant.

There's a soft landing for 2026-27. If you're mandated in from April 2026, you won't get penalty points for late quarterly updates in that first year. This doesn't cover your year-end return, though, which is still due by 31 January 2028 and can be penalised if it's late. Late payment penalties are separate again, and start building from day 16 after the due date. Limited companies aren't on this points system at all, since they report and pay tax through Corporation Tax instead.

Why Are Some Sole Traders Looking at a Limited Company?

Making Tax Digital for Income Tax is based on your personal qualifying income from self-employment and property. Run your business through a limited company instead, and your profits sit inside the company rather than counting straight toward your personal income, which is why this change has a few sole traders looking twice at their setup.

The biggest practical difference is how often you're reporting: sole traders over the threshold send updates to HMRC every quarter, while a limited company reports profits once a year through Corporation Tax, alongside annual accounts filed with Companies House. For some sole traders, trading four deadlines a year for one is a big part of the appeal, especially alongside limited liability, which separates your personal finances from the business.

None of that makes it the right call for everyone. A limited company brings its own responsibilities, including annual accounts, a confirmation statement, and separate obligations around payroll, dividends, and Corporation Tax. It suits some businesses more than others depending on income and plans, and it's a different shape of admin rather than less admin altogether.

If you're weighing this up, it's worth understanding both the benefits and the added admin before deciding, rather than assuming one structure is automatically better.

Find out more about incorporating a limited company with Companies MadeSimple.

FAQs

What is Making Tax Digital?

Making Tax Digital is HMRC's move away from paper and manual tax records toward digital ones. For sole traders and landlords, the version that matters is Making Tax Digital for Income Tax, which requires digital record keeping and quarterly updates instead of a single annual tax return, once your income is over the relevant threshold.

Do I need to register for Making Tax Digital if I'm a sole trader?

It depends on your qualifying income. From April 2026, it applies if you earn over £50,000. From April 2027, that drops to over £30,000. From April 2028, it drops again to over £20,000. Below these thresholds, you can join voluntarily but you won't be required to. 

Do I need to register for Making Tax Digital if I'm a sole trader earning under £20,000?

Not under the current published timeline. The £20,000 threshold applies from April 2028, and anyone below it can still choose to join voluntarily.

What software do I need for Making Tax Digital for Income Tax?

You'll need HMRC-recognised, MTD-compatible software. HMRC has said free products should be available for businesses with simple affairs, alongside a range of paid options.

Does Making Tax Digital replace my Self Assessment tax return?

It replaces the single annual return with quarterly updates plus a final declaration, but you're still reporting to HMRC through the same Self Assessment system.

Can I get an exemption from Making Tax Digital?

Yes, in some cases. Exemptions broadly mirror those already in place for MTD for VAT, including digital exclusion. You can apply in writing or by phone.

Does switching to a limited company get me out of Making Tax Digital?

Not entirely, but it does change what it applies to. Making Tax Digital for Income Tax is based on sole trader and property income, so it doesn't apply to limited company profits in the same way. Limited companies still have their own separate reporting obligations, including annual accounts and a confirmation statement with Companies House.

What happens if I don't comply with Making Tax Digital once I'm mandated?

You'll build up penalty points for missed quarterly updates or a late year-end return, and a £200 fine lands once you hit 4 points. There's a soft landing on quarterly updates for 2026-27, but it doesn't cover the year-end return or late payment penalties, so it's worth staying on top of dates from day one.

This article is for general information only and does not constitute legal or tax advice. Rules and thresholds can change, and requirements can vary depending on individual circumstances, so it's worth checking the latest guidance on GOV.UK or speaking to a qualified accountant before making decisions.