Preparing for Making Tax Digital: What Sole Traders and Landlords Need to Know

From April 2026, the way many sole traders and landlords report their income to HMRC will undergo a major transformation. The government’s Making Tax Digital (MTD) initiative is set to modernise the UK tax system, aiming to streamline the process, reduce errors, and encourage more timely tax compliance. This article covers what these changes mean for you, who will be affected, and how to prepare for the transition.

Understanding Making Tax Digital for Income Tax

MTD for Income Tax is designed to move the process of recording and submitting income and expenses into the digital age. Instead of the traditional annual Self-Assessment tax return, individuals within the scope of MTD will need to keep digital records and submit updates to HMRC throughout the year. The intention is to make tax administration more accurate and efficient, reducing the risk of mistakes and making it easier to stay on top of your obligations.

Who Will Be Impacted?

The new rules will apply to self-employed individuals and landlords who currently file a Self-Assessment tax return. At this stage, MTD for Income Tax does not extend to Limited Companies, Partnerships, Limited Liability Partnerships, or Trusts. The rollout will happen in stages, based on gross qualifying income:

•  Phase 1 from April 2026: Taxpayers with gross qualifying income of more than £50,000 (based on the 5 April 2025 tax return)
• Phase 2 from April 2027: Taxpayers with gross qualifying income of more than £30,000 (based on the 5 April 2026 tax return)
• Phase 3 from April 2028: Taxpayers with gross qualifying income of more than £20,000 (based on the 5 April 2027 tax return).

Gross qualifying income is calculated as the total income before expenses from all sole trade and property businesses combined. If you have both types of income, they are added together to determine if you meet the threshold. For jointly owned property, only your share of the income is counted.

What Will Change?

Once within the scope of MTD for Income Tax, you will need to:

• maintain digital records using software that meets HMRC’s requirements
• submit quarterly summaries of your income and expenses
• file a final digital declaration at the end of each tax year
• choose suitable software.

A key part of MTD is the requirement to use compatible software for record-keeping and submissions. HMRC provides a list of approved solutions, ranging from straightforward apps for simple tax affairs to more comprehensive packages like Xero or QuickBooks for those with more complex needs. Selecting the right software early will help ensure a smooth transition.

Keeping Digital Records

You will need to record every transaction related to your sole trade or property business, including the date, amount, and nature of each item. For those whose income is above the MTD threshold but below the VAT registration threshold, there is an option to use simplified reporting. In this case, you can submit total income, total expenses, and net profit each quarter, rather than categorising every transaction.

Quarterly Reporting and Deadlines

Quarterly updates must be submitted using your chosen software. These are cumulative, meaning each return includes figures for the year so far, allowing for corrections to previous quarters without resubmitting earlier returns. The deadlines for these updates will depend on whether you follow tax quarters or calendar quarters.

The Final Declaration

At the end of the tax year, you will need to submit a final declaration, which will replace the current Self-Assessment tax return. This is your opportunity to provide details of any other income sources and ensure your tax position is correct before HMRC calculates your final liability.

Voluntary Participation and Testing

If you wish, you can sign up to test MTD for Income Tax before it becomes mandatory. However, you will still need to complete a Self-Assessment tax return for the 2024/25 tax year. During the testing phase, there will be no penalties for missing quarterly deadlines, but once MTD is fully live, a points-based penalty system will apply for late submissions.

Managing Changes and Exemptions

If your circumstances change after joining MTD (for example, you start or stop a business), you must inform HMRC. There is also a digital exclusion exemption for those who cannot use computers due to age, disability, location, or religious reasons. Applications for exemption will need to be made directly to HMRC, with further guidance expected in due course.

Getting Ready

Making Tax Digital for Income Tax represents a significant change in how many people manage their tax affairs. By understanding the requirements and preparing in advance – choosing suitable software, getting used to digital record-keeping, and familiarising yourself with quarterly reporting – you can ensure a smooth transition.

We are proactively reaching out to clients who will need to comply with MTD for Income Tax by April 2026. If you have any questions or would like support in preparing for these changes, you can contact us on our dedicated email address MTD@gwayre.co.uk.