The way you manage your taxes is changing. HMRC’s Making Tax Digital (MTD) initiative is designed to move the UK tax system toward a fully digital environment. For sole traders and landlords, this means moving away from annual paper-based filings and toward digital record-keeping and quarterly updates.
While change can be daunting, getting ahead of the curve now will save you stress and ensure your business remains compliant. Here is everything you need to know about the upcoming requirements and how to prepare.
Who Does MTD Apply To and When?
HMRC has set out a phased rollout for Making Tax Digital for Income Tax Self Assessment (ITSA). The requirements depend on your total qualifying income (the combined income from your business and property before expenses).
April 2026: Sole traders and landlords with a total qualifying income of more than £50,000 must join MTD for ITSA.
April 2027: Those with a total qualifying income of more than £30,000 will be brought into the scheme.
Future Dates: The government has committed to reviewing the needs of smaller businesses (those with income below £30,000) before mandating further rollouts.
Under these rules, you will no longer file a single Self Assessment tax return at the end of the year. Instead, you will be required to keep digital records and send quarterly updates of your income and expenses to HMRC using MTD-compatible software.
Option 1: Business Bank Accounts with Built-in MTD Software
One of the simplest ways to comply with MTD is to use a business bank account that integrates bookkeeping and tax filing directly into its mobile app or web portal. This is often the most cost-effective and streamlined route for sole traders.
Some popular examples include:
NatWest/Royal Bank of Scotland (FreeAgent): These banks offer the powerful FreeAgent accounting software for free to their business customers. FreeAgent is fully HMRC-recognised and automates much of the MTD process.
Mettle: A digital business bank (part of the NatWest Group) that also provides FreeAgent for free, specifically tailored for small businesses and freelancers.
Monzo Business: Monzo offers “Tax Pots” and integrations with accounting tools, and their Pro tier includes features that help categorize spending for tax purposes.
Starling Bank: Starling offers a “Business Toolkit” add-on that allows you to record VAT, automate invoices, and prepare for MTD filings directly from your banking app.
Option 2: HMRC-Recognised Accounting Software
If you prefer to keep your banking and accounting separate, or if you have more complex requirements, you can use standalone HMRC-recognised software. These platforms connect directly to your bank account via Open Banking to pull in transactions automatically.
Leading examples include:
Xero: Highly popular for its user-friendly interface and extensive range of add-ons.
QuickBooks: Offers a specific “Self-Employed” version designed for MTD compliance.
Sage: A robust option for those who want detailed reporting and long-term scalability.
FreshBooks: Known for its excellent invoicing features and ease of use for service-based sole traders.
How to Start Preparing Today
Check your income: Review your last tax return to see if your qualifying income exceeds the £50,000 or £30,000 thresholds.
Separate your finances: If you haven’t already, open a dedicated business bank account. This makes digital record-keeping significantly easier.
Choose your software: Decide whether you want a bank-led solution or a standalone software package.
Go digital now: Don’t wait for the deadline. Start recording your expenses digitally today so the transition in 2026 or 2027 is seamless.
Making Tax Digital is a significant shift, but with the right tools and support, it can actually make managing your business finances faster and more accurate. If you need help choosing the right software or getting your records in order, get in touch with us today!