A ‘Making Tax Digital’ wake-up call for sole traders

The way Britain pays tax is entering its biggest modernisation in a generation, with Making Tax Digital (MTD) for Income Tax set to reshape the entire Self Assessment process from April 2026.

Yet despite the scale of this shift, awareness is worryingly low, with recent MTD research by Sage and IPSE suggesting that 39% of sole traders still haven’t started preparing for what’s ahead.

That makes it a potential compliance crunch for hundreds of thousands of self-employed people who risk scrambling to catch up as deadlines approach.

Let’s break down what’s happening, what’s changing, and how you can get ahead of MTD before the new rules roll out.

A quick recap on Making Tax Digital

Announced in 2015, Making Tax Digital was planned to apply to VAT, income tax for the self-employed and landlords, and corporation tax.

So far, MTD has only been partly rolled out, introduced for VAT in 2022, becoming mandatory for all VAT registered businesses regardless of turnover.

It doesn’t apply to limited companies, though some may already use MTD for VAT if they’re VAT-registered. It’ll also be intended for partnerships in the future, though no time scale has been set yet.

Next steps for Making Tax Digital

MTD for Income Tax is the next major step, starting April 2026. The rollout looks like:

• From 6th April 2026 – mandatory for those earning over £50,000 from self-employment and/or property for the 2024/2025 tax year.
• From 6th April 2027 – mandatory for those earning over £30,000 for the 2025/2026 tax year.
• From 6th April 2028 – planned extension to those earning over £20,000 for the 2026/2027 tax year.

What MTD actually means for sole traders

Hailed by HMRC as the “biggest change to Income Tax in over 30 years”, Making Tax Digital will fundamentally change how you record and report your tax information. And if your income is over the £50k threshold, you’ll need to start following the new system from April 2026.

Here’s what the new system requires:

Keep digital records

You must log receipts and invoices using Making Tax Digital‑compatible software. If you’re an avid spreadsheet user, don’t worry – you can still use them, they just have to be linked via an approved bridging tool.

Submit quarterly updates

You’ll need to send quarterly updates to let HMRC know about your income and expenses. These won’t be full tax returns, just quick simple summaries pulled from your MTD-compatible software.

So as long as you’re keeping your logs updated as you go, you can send your quarterly reports at a click of a button!

File a final annual tax return

You’ll still need to submit an annual tax return, but the new system will replace the current Self Assessment process from your 2026/2027 tax year submission onwards. Your MTD-compatible software will be able to pull your quarterly updates into an end-of-year summary for you – less paperwork to juggle!

Be aware of new penalty rules

The new process brings new risks of non-compliance. MTD brings with it a points-based penalty system, with points given for each late submission. Reaching four penalty points will result in a £200 penalty. So occasional slips-up won’t result in immediate fines but repeatedly missing deadlines will.

It’s important to note that those required to use MTD from April 2026 won’t get penalty points for late quarterly updates for the first 12 months. Penalties for late tax returns will still apply though.

Still pay your tax bill once a year

Before anyone panics, quarterly reports don’t mean 4 tax bills. You’ll still pay your tax by the normal 31^st January deadline by signing into your online tax account or the HMRC app (just like you do now).

How sole traders can prepare for Making Tax Digital: 3 steps to get ready

Switching up how you manage your tax might leave you feeling a bit off kilter, but it doesn’t necessarily need to be the upheaval it sounds like.

Yes, it could be a bit of a change but HMRC’s Making Tax Digital campaign page breaks it down into 3 simple steps you can follow to get ready before your MTD start date.

1. Know when YOU need to join

Knowing your start date will give you a timeframe to get your ducks in a row. Your start date depends on your turnover:

• Over £50k qualifying income → join 6th April 2026
• Between £30k -£50k qualifying income → join 6th April 2027

You can check now when you need to use Making Tax Digital for Income Tax.

2. Choose MTD-recognised software

Getting the right software in place will make the transition to the new process easier. You’ll need to find approved software that you can use to:

• Record income and expenses
• Submit digital updates
• File your final declaration
• Manage and record CIS deduction calculations and payments (if applicable)

HMRC provides official guidance on choosing MTD software, including bridging options.

3. Sign up in time

Sign up for Making Tax Digital before your start date. Even if your income means you won’t be expected to use MTD until 2027 (or later), HMRC actively encourages early adoption so you can get familiar with the new process before it becomes mandatory.

What MTD means for CIS sole traders

If you’re a subcontractor registered under the Construction Industry Scheme (CIS), you’ll still follow the same MTD rules as other self-employed workers if/when your income exceeds the threshold.

The main thing to keep in mind is that CIS applies to how you’re paid and MTD is about how you report it.

How MTD interacts with your CIS payments

You’ll need to continue sending your monthly CIS returns to get deductions. When the new MTD system kicks in you’ll just include your CIS deductions in your quarterly updates.

There are some software options that can handle both MTD and CIS so it’s worth checking with providers. This would mean you can streamline your record-keeping processes and won’t be doubling up on reporting.

MTD for Income Tax timeline

If you’re in the cohort required to use MTD from April 2026 (for the 2026/2027 tax year), HMRC’s outline of key dates might help you understand how the new process plays out over the next couple of tax years.

Save these dates – they’ll soon be part of your financial routine.

Final thoughts

MTD is coming – and it’s coming fast. While a surprisingly large number of sole traders haven’t started preparing, getting ahead now will save you stress, time, and potential penalties later on.

If you take one thing away from this blog, let it be this:

Digital tax isn’t an overnight change – it’s a transition.

The next year or so will be a combination of older ways to submit Self Assessments and new ways to submit quarterly reports. But the expectation is that this transition will have you coming out the other side with a simpler process to follow in the long run.

How insurance can support you during the transition

MTD introduces more digital processes, more admin, and more dependence on technology.

Think of insurance as your financial safety net, particularly while you adjust to a more digital world of tax reporting. It can help protect against some of the new risks:

✔ Legal expenses insurance

Legal expenses insurance can cover professional fees to defend HMRC investigations into your tax, VAT, PAYE or National Insurance contributions.

✔ Cyber liability insurance

When your tax system goes digital, cyber liability insurance can provide financial cover in the event of cyber attacks. That could include business interruption costs, data recovery, regulatory defence fees and ransom costs.

Where Kingsbridge comes in

Running a business can be complicated enough without having to juggle multiple insurance policies on top of new legislation and tax processes.

That’s why Kingsbridge has designed comprehensive insurance solutions so you can get the business cover you need under one roof.

With our Contractor Insurance package, you get standard cover like Public Liability, Professional Indemnity and Personal Accident alongside optional add-ons like our Cyber Liability and Legal Expenses insurance policies.

Interested in a quote or need help finding the right cover for your business? Get a quote online in minutes or give us a call to discuss your needs on 01242 808 740.

Making Tax Digital FAQs

Do I still need to file a tax return?

Yes. You’ll still submit an annual final declaration, but a lot of the information will be drawn from your quarterly submissions making it quicker and easier to do.

What is “qualifying income” for Making Tax Digital?

Qualifying income refers to your gross income from self-employment and property, before expenses. This is used to determine if you fall above or below the threshold for MTD.

Can I keep using spreadsheets?

You can keep using spreadsheets providing you connect them via HMRC-approved bridging software. It’s also worth keeping in mind that you may need to alter the format of the spreadsheet to make it compatible for the bridging software to export from – so it knows how to ‘read’ it.

Who is exempt from Making Tax Digital?

You may qualify for an exemption if you think you’re ‘digitally excluded’ – meaning you think it’s unreasonable for you to use compatible software to manage and submit your tax records.

You may be exempt if your age, a disability, health conditions or your location prevents you from using a phone, tablet or computer.

You can find out if you’re exempt from Making Tax Digital.

Can my accountant do Making Tax Digital for me?

Yes, you can choose to have one or more professionals help you manage MTD for Income Tax. HMRC refer to these as “tax agents” and can each play their own part in managing your tax records.

For example, a bookkeeper could help you manage your quarterly updates, and your accountant can finalise your tax records and submit your tax return for you.

What happens if I miss an MTD deadline?

Missing a Making Tax Digital deadline will result in penalty points. You won’t immediately receive a fine but accumulating too many penalty points can result in a £200 penalty.

Is Making Tax Digital different from Self-Assessment?

Yes – Self Assessment relies on one annual tax return and is traditionally quite manual with more paperwork. MTD requires consistent digital record-keeping and quarterly submissions using HMRC-compatible software which is then used to generate a yearly tax return.

How do I sign up for Making Tax Digital?

You can head to the HMRC Making Tax Digital sign-up page to register. You may need a few details to hand like proof of ID, answers for questions relating to your identity (passport details, credit reference, latest P60 etc.) and your user ID and password from when you registered for Self Assessment.

Do I need to buy software for MTD?

It’s not necessary to spend money on software for Making Tax Digital. There are both free and paid software options out there. What you choose will depend on your budget, preferences and feature requirements (like camera receipt scanning).

It’s important to remember that while free options will do what you need for MTD, there may be some restrictions to how you can use it.