Making Tax Digital (MTD) is one of the most significant changes to the UK tax system in recent years. If you’re a sole trader, contractor or small business owner, it’s important to understand what’s changing, when it’s happening, and what you need to do to stay compliant.
With the next phase approaching, now is the time to get ready.
What Is Making Tax Digital?
Making Tax Digital is a government initiative from HMRC designed to modernise the UK tax system. The goal is to make tax administration more effective, efficient and easier for taxpayers by:
- Requiring digital record-keeping
- Submitting tax information to HMRC using compatible software
- Providing more regular updates instead of one annual tax return
MTD has already been introduced for VAT-registered businesses. The next major stage affects Income Tax.
What Is Changing for Income Tax?
Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) will apply to:
- Sole traders
- Self-employed individuals
- Landlords
If your qualifying income exceeds the relevant threshold, you will need to:
- Keep digital records of income and expenses
- Submit quarterly updates to HMRC using approved software
- Submit an End of Period Statement (EOPS)
- Submit a Final Declaration (replacing the traditional Self Assessment tax return)
This means moving away from once-a-year reporting to a more regular, digital system.
Who Will Be Affected?
MTD for Income Tax will apply to individuals with gross income from self-employment and/or property above HMRC’s threshold.
If you are:
- A contractor operating as a sole trader
- A freelance professional
- A landlord with rental income
- A small business owner not operating through a limited company
You are likely to be affected once your income exceeds the threshold.
Even if your income is below the threshold, moving to digital systems early can make managing your finances significantly easier.
What Does This Mean in Practice?
For many business owners, this represents a shift in how bookkeeping is managed.
You will need to:
1. Use Compatible Accounting Software
Spreadsheets alone will not be sufficient unless they are linked to bridging software that submits directly to HMRC. Cloud accounting software will become essential.
Sage Accounting / Sage Individual – HMRC-recognised software suitable for sole traders and small businesses, including a free tier for simple digital record-keeping. Perfect for getting started with MTD for Income Tax. Sage MTD‑compatible solutions (Sage UK)
Xero – Cloud-based accounting software approved by HMRC for MTD compliance. Provides digital record-keeping, bank integration and direct submission for VAT and Income Tax. Xero MTD software (UK)
QuickBooks UK – HMRC-recognised solution that helps you manage bookkeeping and MTD submissions. Especially good for small businesses and freelancers looking to streamline compliance. QuickBooks MTD software (UK)
HMRC also provides an official list and software finder tool so you can check other MTD-compatible options — including record-keeping tools, bridging software (if you want to link spreadsheets) and solutions tailored to property or mixed income. Find HMRC‑recognised MTD software (GOV.UK)
Tip: Before choosing software, think about how you currently manage your finances — do you need simple digital records, or a platform that also tracks invoices, bank feeds and expenses? Many providers offer free trials so you can test functionality before committing.
2. Keep Digital Records
You must maintain digital records of:
- Business income
- Allowable expenses
- Dates and amounts of transactions
This reduces errors and ensures information is up to date.
3. Submit Quarterly Updates
Instead of filing once per year, you will send summary updates to HMRC every quarter. These updates give HMRC an estimate of your tax position throughout the year.
4. Complete Year-End Submissions
At the end of the tax year, you will confirm your figures and submit final adjustments.
Why This Matters for Contractors and Sole Traders
If you are used to gathering receipts once a year and sending everything to your accountant in January, MTD will require a more structured and ongoing approach.
The benefits can include:
- Better visibility of your tax position
- Fewer surprises at year-end
- Improved cash flow planning
- Reduced risk of errors and penalties
However, leaving preparation too late could result in stress, missed deadlines or non-compliance.
How to Prepare Now
Even if your start date is still some time away, taking action early will make the transition much smoother.
Here’s what we recommend:
Review Your Current Record-Keeping
Are you still using spreadsheets or paper records? It may be time to move to cloud accounting software.
Speak to Your Accountant
A proactive conversation now can help you understand your obligations and timeline.
Get Comfortable with Digital Tools
Cloud software allows you to:
- Upload receipts via mobile apps
- Connect your bank feeds
- Track income in real time
- Monitor tax estimates
Plan for More Frequent Reporting
Quarterly reporting requires more consistent bookkeeping. Setting aside time each month will make compliance straightforward.
Final Thoughts
Making Tax Digital represents a major shift in the way tax is reported in the UK. While change can feel daunting, with the right preparation and support, it can actually improve how you manage your finances.
If you’re unsure how MTD affects you, now is the ideal time to get advice from your accountant and put the right systems in place.
Speak to an expert