Skip to content
Contact us
All posts

Making Tax Digital: What SMEs and Sole Traders Need to Know

By  SWLA Accounting  ·  3 minute read

If you've been wondering whether Making Tax Digital affects you this year, you're not alone. Making Tax Digital, or MTD, is HMRC's ongoing shift towards digital record-keeping and quarterly reporting, and it's no longer a distant future change. MTD for VAT has been mandatory since 2022, and MTD for Income Tax has now started rolling out too, in stages, based on income. Here's what's actually in effect, what's coming next, and what it means for your business.

Where things stand right now

MTD for VAT already applies to every VAT-registered business, regardless of turnover, requiring digital records and MTD-compliant software for VAT returns. The bigger recent change is MTD for Income Tax Self-Assessment (MTD ITSA), which became mandatory from 6 April 2026 for sole traders and landlords with qualifying income over £50,000. If that's you, you should already be keeping digital records and submitting quarterly updates rather than a single annual return.

The phased rollout - who's affected and when?

MTD for Income Tax is being introduced in stages, based on gross income from self-employment and/or property:

  • From 6 April 2026 - mandatory for qualifying income over £50,000

  • From 6 April 2027 - threshold drops to over £30,000

  • From 6 April 2028 - threshold drops further to over £20,000

Your income is checked against your most recently filed Self-Assessment return, so it's worth checking your figures now rather than assuming you're out of scope, particularly if you're close to a threshold.

What actually changes under MTD for Income Tax

Instead of a single annual Self Assessment return, affected sole traders and landlords now need to:

  • Keep digital records of income and expenses using MTD-compatible software

  • Submit a quarterly update to HMRC every three months

  • Submit a Final Declaration by 31 January, replacing the old annual return

Missing a deadline no longer results in a single fixed fine. A new points-based penalty system applies, where each missed submission adds a point, and penalties kick in once you reach the threshold. This, if not done on time, can costs business owners a lot.

How is MTD for Income Tax different from MTD for VAT?

This is one of the most common points of confusion, and worth clearing up. MTD for VAT has been running since 2022 and only affects your VAT returns, filed as usual. MTD for Income Tax is a much bigger shift. It replaces your entire annual Self-Assessment return with quarterly digital updates plus a year-end Final Declaration, and it applies based on your income from self-employment or property, not your VAT registration. It's entirely possible to be in scope for one, both, or neither, depending on your circumstances.

Signs it's worth getting ahead of this now

A few signals suggest it's time to act rather than wait for your mandatory start date:

  • Your income is close to one of the thresholds, and could tip you into scope sooner than expected

  • You're still relying on spreadsheets or paper records rather than cloud accounting software

  • You've never used MTD-compliant software and aren't sure what "compatible" actually means

  • You're unsure whether income from a second property or side business counts towards your threshold

None of these alone means you need to act immediately, but together they're usually a sign it's worth getting your bookkeeping in order before a deadline forces the issue.

Common questions we hear

A few things tend to catch business owners out. Wages, dividends, pensions and other PAYE income don't count towards your MTD threshold. It is only income from self-employment and property. Partnerships and limited companies aren't yet mandated under MTD for Income Tax, though this is expected to be considered in a future phase. And if your income sits below the threshold, you can still choose to join voluntarily, which some business owners do simply to get ahead of the transition before it becomes compulsory for them.

How South West Legal and Accounting can help

We support sole traders, landlords and small business owners through Making Tax Digital, from getting the right software in place to handling your quarterly submissions on your behalf, so nothing falls through the cracks. We offer a free, no-obligation review of your current setup, giving you a clear picture of whether MTD affects you now, or when it will. Feel free to get in touch, and we would be very happy to help.