Making Tax Digital for Income Tax: What UK Sole Traders Must Know

Making Tax Digital for Income Tax: What UK Sole Traders Must Know

The move toward a fully digital tax system is gathering pace across the UK, and for sole traders and landlords, the time to gain clarity is now. HMRC’s Making Tax Digital (MTD) for Income Tax initiative promises not just a new way to submit returns but a fundamental rethinking of how accounts are kept and shared with the authorities. As the pilot extends, it’s clear that successful navigation will depend on understanding the nuances, embracing technology, and heeding the practical guidance of experienced accountants.

Who Does the Expanded Making Tax Digital Pilot Apply To?

Starting April 2025, the expanded MTD pilot widens the net for both UK sole traders and landlords. If you’re self-employed or drawing income from property, the digital record-keeping mandate is coming into sharper focus. The threshold for compulsory participation is currently set. Individuals with income over £50,000 (from self-employment and/or property combined) are the first group directly affected. HMRC indicates this will impact around 2.6 million self-employed people and nearly a million property landlords nationwide. From April 2027, the threshold drops to £30,000, drawing in even more small business owners and property professionals.

Participation in the pilot also has an element of voluntary engagement, allowing those who want to get ahead of the curve to test digital tools with support from HMRC and software partners. For accountancy firms, this represents a significant opportunity to onboard clients early and address any issues before they become mandatory.

Expected Rollout Timeline and Key Milestones

The timeline for MTD for Income Tax has witnessed several shifts as HMRC refines their approach. Here’s how the path looks for the next phase:

• April 2025: Expanded public pilot, with HMRC opening access to a much broader section of sole traders and landlords, not just those hand-picked for early testing. Agents are being encouraged to sign up clients now to build their digital confidence.
• April 2026: Full mandation begins for sole traders and landlords with qualifying income above £50,000. Quarterly submissions and digital records become the norm for this group. Gone are the days of only one annual return.
• April 2027: The lower threshold of £30,000 comes into effect. Many more sole traders. Those who’ve so far managed with paper records or basic spreadsheets. Will need to adopt compatible software and digital workflows.

A year of public pilot phase activity across 2025/26 is intended to iron out issues in real-world conditions. This is a golden window for accountants to guide clients through the transition before it’s compulsory.

Software Requirements and Digital Record Keeping Rules

Complying with MTD means more than shifting from paper to spreadsheet. HMRC requires businesses and landlords to:

• Keep digital records (using HMRC-approved software)
• Submit quarterly updates on income and expenses
• File an annual final declaration (the replacement for the current Self Assessment)

The software in use must support real-time data entry or seamless transfer from banking or point-of-sale systems. Manual data entry into spreadsheets that aren’t connected directly to compliant software is no longer enough. The required apps should have direct links to HMRC’s systems and offer strong security features. Storing data in separate files across devices or relying on unintegrated tools simply won’t meet the new standards.

Historical experience shows that businesses who invest early in robust, compatible platforms tend to experience the smoothest transitions. Switches made in haste, or last-minute upgrades, too often result in compliance hiccups and scrambling for help at deadline time.

Accountant Recommendations for Seamless Migration

Accountants on the front line have witnessed countless digital transformations. Some smooth, others less so. Here’s what top advisors recommend to ensure clients and their businesses aren’t caught out:

• Start Early: Even if you’re not mandated until 2026 or 2027, voluntarily joining the public pilot now will help you acclimatise to MTD-compliant software and reporting requirements before penalties apply.
• Select Software Carefully: Look for solutions with HMRC recognition. Prioritise platforms with strong automation features, integrations with banking and invoicing, and scalability for future tax changes.
• Invest in Training: Make use of training resources provided by both your software provider and your accountant. Understanding process changes removes surprises and streamlines your workflow.
• Engage with Your Accountant: Early collaboration ensures that queries are resolved upfront, updates are scheduled, and you remain informed of any regulatory shifts or feature updates in your chosen software.
• Test in Real Time: Use the pilot phase to run parallel systems if needed. Compare digital records to your previous methods so discrepancies are caught and resolved ahead of any official requirements.

Having supported businesses through the digital VAT rollout, experienced accountancy teams are well placed to help clients interpret MTD’s rules, select the right technology, and avoid common pitfalls.

The Real-World Impact for Sole Traders & Landlords

The shift to digital tax compliance can appear daunting, especially if routine has relied on receipts in a box and last-minute spreadsheet updates. Yet this isn’t simply about satisfying HMRC. For many, the transition unlocks smarter business habits: instant insight on cash flow, easier access to finance, reduced risk of missed deadlines or errors, and ultimately, more time focused on growing the business. Not scrambling to gather data.

Digital workflows also increase transparency. With secure, up-to-date records, you reduce the chance of accidental under-reporting or penalties. Accountants find it easier to support proactive tax planning, rather than just retrospective troubleshooting. For landlords operating multiple properties or sole traders juggling various contracts, digital record keeping can bring genuine order to financial chaos.

What to Do Next: Steps for Accountancy Firms and Their Clients

Successful migration to Making Tax Digital isn’t a last-minute sprint. It’s a carefully mapped journey. For accountants, this means proactively segmenting clients based on business type and digital readiness, prioritising high-income sole traders and landlords first. Early assessment meetings, targeted software recommendations, and thorough onboarding workshops will save valuable time. And headaches. Down the line.

For sole traders and landlords, engaging with your accountant now is the best step. Ask questions, book a demonstration of compliant software, and get familiar with the new reporting rhythm. Expect periodic reviews as both digital platforms and HMRC’s own policies mature over the next two years. If you’re eligible for the pilot, participate actively and provide feedback. Helping shape a system that works for real businesses.

The landscape of UK tax compliance is changing fast, designed ultimately to streamline business operations, reduce error, and allow seamless interaction with HMRC. As deadlines loom, the firms and individuals who prepare in stages will be best equipped to thrive in a digital-first fiscal world.

Frequently Asked Questions

Who must comply with Making Tax Digital for Income Tax and when?

Sole traders and landlords with annual combined turnover above £50,000 must comply from April 2026. The threshold falls to £30,000 from April 2027, capturing a wider group of businesses and property owners.

What are the main software requirements to comply with MTD for Income Tax?

You must use HMRC-approved software that enables digital record keeping, integrates with bank feeds or invoicing tools, and allows direct submission of quarterly updates and a final declaration to HMRC.

Are spreadsheets still allowed under MTD?

Manual spreadsheets are only permitted if used with digital bridging software that links directly with HMRC. Purely manual records, or spreadsheets not connected through API-compliant solutions, do not meet requirements.

Do I still need an accountant if I’m using digital record-keeping software?

Absolutely. Accountants provide crucial guidance on correct record-keeping practices, optimise tax efficiency, and help you adapt to regulation changes. Their support is especially valuable during system migration phases.

What’s the biggest pitfall for businesses migrating to MTD?

Leaving migration late is the most common misstep. Early adoption and testing, supported by your accountant, is the best way to ensure compliance and business continuity as the new rules become mandatory.