Making Tax Digital (MTD) for Sole Traders

The UK government's Making Tax Digital (MTD) initiative is transforming the tax system, making it more efficient and easier for taxpayers to manage their affairs. As a sole trader, it's essential to understand how these changes impact you and how to prepare effectively.

What Is Making Tax Digital?

MTD is a government-led program aiming to digitise the UK's tax system. The goal is to reduce errors, streamline processes, and make tax administration more effective. This involves maintaining digital records and submitting tax information to HM Revenue & Customs (HMRC) through compatible software.

Key Dates for Sole Traders

• April 2026: Sole traders with an annual income over £50,000 must comply with MTD for Income Tax Self Assessment (ITSA).

• April 2027: The threshold lowers to include those earning over £30,000.

  
  

These dates mark when digital record-keeping and quarterly submissions become mandatory for affected sole traders.

What Does This Mean for You?

If your income exceeds the specified thresholds, you'll need to:

• Maintain Digital Records: Keep track of your income and expenses using MTD-compatible software.

• Quarterly Updates: Submit updates to HMRC every three months, providing a snapshot of your financial position.

• End-of-Period Statement: Confirm the accuracy of your reports at the end of the tax year.

• Final Declaration: Submit a declaration in place of the traditional Self Assessment tax return.

  
  

Preparing for MTD

To ensure a smooth transition:

1. Assess Your Income: Determine if your annual income exceeds the £50,000 or £30,000 thresholds.

2. Choose Compatible Software: Select software that aligns with MTD requirements to manage your digital records and submissions.

3. Stay Informed: Keep abreast of updates from HMRC regarding MTD to ensure ongoing compliance.

   
   

Voluntary Participation

Even if you're below the income thresholds, you can opt into MTD voluntarily. Early adoption may help you familiarise yourself with the system and streamline your tax processes ahead of mandatory implementation.

How we can help

Transitioning to digital accounting before MTD for ITSA starts in April 2026 is beneficial. Partnering with an accountant who provides accounting software enhances these benefits, offering extra support and saving time. As FreeAgent partners, we offer this software to all clients within our accountancy packages.

FreeAgent is a robust cloud-based accounting software designed specifically for freelancers, contractors, and small business owners. With a user base exceeding 150,000, it provides a comprehensive suite of financial tools that streamline accounting processes and enhance productivity.

Key Features of FreeAgent

• Invoicing: Create and send professional invoices quickly, with customisable templates and automated reminders.

• Expense Tracking: Easily record and categorise expenses, allowing users to keep track of their spending and manage budgets effectively.

• Time Tracking: Log hours worked on projects directly within the platform to ensure accurate billing and project management.

• Bank Integration: Sync bank accounts to automatically import transactions, simplifying reconciliation and reducing manual entry.

• Reports and Analytics: Generate detailed financial reports to gain insights into business performance and make informed decisions.

Contact us to discover more about MTD and our services