The introduction of Making Tax Digital (MTD) represents a significant shift in how sole traders and self-employed individuals manage their tax affairs. With the rules extending to income tax from 6 April 2026, it is crucial for self-employed business owners and landlords to understand what this means for them and how to prepare. This article explores the key aspects of Making Tax Digital for the Self Employed, outlining compliance requirements, timelines, benefits, exemptions, and practical steps for signing up.
What Does Making Tax Digital Mean for the Self-Employed?
Making Tax Digital for Income Tax (MTD for IT) requires sole traders and landlords with an overall income exceeding £50,000 to use HMRC-recognised digital software by 6 April 2026. Those earning above £30,000 will be mandated from April 2027, and those with incomes over £20,000 from April 2028.
This system replaces the traditional method of filing tax returns via HMRC’s website with a requirement to keep digital records and submit quarterly updates using compatible software. In addition to these updates, a Final Declaration, encompassing all taxable income, must be submitted by 31 January each year.
Many VAT-registered sole traders are already acquainted with MTD, as rules have applied to VAT returns since April 2019 for businesses above the £85,000 threshold, and for all VAT-registered businesses since April 2022. Notably, the VAT registration threshold increased to £90,000 as of 1 April 2024, and HMRC automatically enrols eligible businesses in MTD upon registration.
When Does MTD for IT Start for the Self-Employed?
The phased rollout of MTD for IT is based on income levels:
- From April 2026, it applies to sole traders and landlords with income above £50,000.
- From April 2027, those with income above £30,000.
- From April 2028, those with income above £20,000.
This staged approach aims to ease the transition for smaller businesses and landlords.
What is the Deadline for MTD for IT?
Initially scheduled for 2024, the introduction of MTD for IT was postponed to 6 April 2026, aligning with the new Basis Period Reform which sets a universal digital start date. While the deadline may feel distant, early voluntary registration is encouraged to familiarise with the digital processes. Eligibility for early sign-up can be checked through HMRC’s guidance.
Benefits of Making Tax Digital for the Self-Employed
The MTD for IT system offers several advantages:
- Improved Accuracy: Automation reduces human error by linking bookkeeping records directly to tax returns, ensuring figures are consistent and up to date.
- Better Tax Planning: Quarterly updates provide ongoing insight into tax liabilities, allowing for improved cash flow management and proactive preparation.
- Manageable Bookkeeping: Submitting smaller, more frequent updates simplifies record keeping, transforming it from an annual burden into a manageable monthly or quarterly task.
Do All Self-Employed People Have to Go Digital?
Compliance with MTD for IT is mandatory if income thresholds are met, except for those who qualify for digital exemptions. Exemptions include individuals who are digitally excluded due to practical reasons, foster carers, and those without a National Insurance number.
Sole traders earning below the thresholds may continue using traditional filing methods. It is important to note that if a person owns multiple businesses, the combined income counts towards the threshold.
How to Sign Up for Making Tax Digital for IT as a Self-Employed Person
Signing up for MTD for IT requires HMRC-recognised cloud-based accounting software. Registration is completed through this software rather than via the HMRC website. Applicants will need their business name, start date, email address, National Insurance number, and accounting details.
Engaging with your software provider early is advisable to ensure a smooth sign-up process.
Preparing for Making Tax Digital for IT
To prepare effectively:
- Secure compatible accounting software ahead of the 6 April 2026 deadline.
- Consider early registration to gain familiarity with the system.
- Consult your accountant or bookkeeper to ease the transition and address any concerns.
Penalties
New penalties for late filing and late payment will apply as follows:
- From April 2024, volunteers testing MTD for IT face these penalties.
- From April 2026, for those with income over £50,000.
- From April 2027, for those with income over £30,000.
- From April 2028, for those with income over £20,000.
A points-based system will be used for late submissions and payments, alongside existing penalties for errors and interest on late payments. Notably, penalties for missed quarterly updates will not apply during the testing phase.
Recent updates allow HMRC to cancel or reset penalty points and associated fines, while increasing late payment penalties to encourage timely tax payments.
Exemptions from Making Tax Digital
The Digitally Excluded Exemption
Individuals may be exempt if they notify HMRC and demonstrate:
- Religious beliefs that prevent use of electronic communications or records.
- Practical difficulties due to age, disability, or location.
Applications for this exemption must be made when the process opens.
Income Exemption
MTD for IT currently does not apply if gross income is below £20,000, though this is subject to ongoing government consultation.
Qualifying Care Exemption
Individuals providing qualifying care, such as foster care or shared lives care, are exempt. Qualifying care income does not count towards taxable income thresholds.
No National Insurance Number Exemption
Taxpayers without a National Insurance number on 31 January before the tax year are exempt.
Applying for Exemptions
Exemptions can be applied for if automatic eligibility is not met, provided it is unreasonable or impractical to comply digitally.
Making Tax Digital for the Self Employed marks a transformative step in tax administration. Understanding the requirements, benefits, and exemptions is vital for compliance and smoother financial management. Early preparation and adoption of HMRC-recognised software will facilitate a seamless transition to this new digital era in tax reporting