Making tax digital for sole traders
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It’s vital for sole traders to be aware of when Making Tax Digital (MTD) affects them to avoid potential HMRC penalties, financial fines, and a hurried technological catch-up that could end up adding costs to your business.
The transition process to digital can be complex, depending on the size and scale of your accounting system. But it’s manageable, and easier to make the transition if you are already using accounting software.
This guide shows you how to get started with MTD as a sole trader, including the transfer process, and software that benefits sole traders for the long-term.
Mollan & Co provides bespoke digital accounting services, helping you navigate the MTD transition and streamline bookkeeping long-term. Book a zero-obligation consultation today.
Does Making Tax Digital apply to sole traders?
Making Tax Digital (MTD) applies to sole traders on the following conditions:
- You earn more than £50,000 a year. If so, you must register for MTD for Income Tax Self-Assessment (ITSA) by April 2026 (start of tax year).
- Your turnover is between £30,000 and £50,000. If so, you must comply by April 2027 (start of tax year).
- MTD transitions for sole traders with income below £30,000. The deadline and details are yet to be announced. The government may extend it in coming years pending the scheme’s success.
Making Tax Digital timelines for sole traders
MTD introduction has been an incremental process over the past several years:
- Phase 1: In April 2019, VAT-registered businesses with a turnover above £85,000 were required to transition to MTD.
- Phase 2: In April 2022, all VAT-registered businesses became eligible regardless of turnover.
- Phase 3: As of April 2026, MTD applies to Income Tax Self Assessment (MTD ITSA). This means sole traders and landlords with taxable income above £30,000.
Corporation tax and MTD
MTD is not yet compulsory for Corporation Tax. However, it’s expected to be introduced in the future. April 2027 is the expected date.
HMRC has begun introductory programs with participants, letting business owners trial the digital record-keeping process, while getting some practice at filing their corporation taxes digitally.
Read more about Corporation Tax here.
The benefits of Making Tax Digital for sole traders
Making Tax Digital can help sole traders to save time spent on filing returns and addressing administrative paperwork. It could also make life less stressful by reducing the risk of tax liabilities and improving financial management by transitioning to a more streamlined and accessible medium.
- Tax benefits: Digital bookkeeping reduces tax expenses by minimising errors, ensuring accurate tax calculations, and enabling you to claim all eligible expenses efficiently. Automated record-keeping also improves tax compliance, reducing the risk of HMRC penalties.
- Operational efficiency: Making Tax Digital automates data entry and integrates accounting software with business processes, reducing paperwork while facilitating easier financial tracking.
- Risk reduction: Digital tax systems reduce human error and missed deadlines. Digital records also offer better audit trails, ensuring transparency.
- Business growth: Accurate, real-time financial data allows you to make more informed business decisions, optimise cash flow, and allocate resources more strategically.
- Technology & software advantages: Cloud accounting enables remote access, real-time financial reporting, and seamless integration with banking systems. Leveraging AI-powered insights, automated tax calculations and digital invoicing enhance productivity.
How to get started with Making Tax Digital
As a sole trader, it’s better to start the transition to digital record-keeping sooner than later. That way, you gain a competitive advantage by learning the ropes earlier on.
- Check eligibility: Ensure you’re eligible for MTD by checking your income bracket to see if it applies.
- Choose MTD software: You must select HMRC-approved software like Xero for your digital record-keeping and tax submissions. Ensure the software integrates seamlessly with your bank and automates VAT and Self-Assessment calculations.
- Register for MTD: Sign up for MTD through HMRC if you haven’t already. Use Government Gateway ID to link your tax account with your MTD software. HMRC should confirm within 72 hours.
- Maintain digital records: Record all income and expenses digitally via cloud accounting software or MTD-compliant spreadsheets. Update data regularly to avoid last-minute errors.
- Send quarterly updates: Unlike previous methods, MTD requires sole traders to submit tax returns every three months. HMRC will then provide an estimated tax bill based on these.
- Submit final statement: At the end of the tax year, you will submit an End of Period Statement (EOPS) and final declaration to confirm your income.
The best Making Tax Digital software for sole traders
Choosing effective MTD software is vital for meeting HMRC’s standards while simplifying tax management processes. Here’s what to look for:
- HMRC compatibility: The software must be listed as MTD-compliant on HMRC’s official site.
- Quarterly tax submissions: It must facilitate easy submissions for quarterly returns for Income Tax Self Assessment (ITSA).
- Real–time reporting: The software should provide up-to-date insights into changes like tax liabilities, ensuring they get addressed promptly.
- Invoice & expense management: It should include tools for sending and managing invoices, tracking payments (incoming and outgoing). Essentially a full expense management system.
- Bank syncing: It should sync with your business’s bank accounts to track transactions without manual input.
- Mobile access: This is important for facilitating tax management on-the-go, increasing efficiency and convenience.
- VAT filing (if applicable): It should enable VAT submissions if your business is VAT-registered.
Transfer to Making Tax Digital with Mollan & Co
MTD is an inevitability for sole traders, so preparing earlier than later will enhance learning, and make the transition more fluid.
Mollan & Co are leading experts in cloud accounting and have assisted countless clients in business transformation through digital accounting. We ensure our clients stay compliant, efficient, and productive.
Get in touch today to book your free, no-obligation consultation.
Frequently Asked Questions
What will it cost sole traders to transition to MTD?
HMRC has estimated the average transitional cost for sole traders and landlords to be £320, with the annual cost standing at £110, depending on your turnover bracket.
Do I have to adopt digital?
Not really. The initiative requires most sole traders to adopt digital record-keeping and tax filing, but there are exceptions including age, disability, geographical location, religious objections, and other reasons for unreasonableness or impracticality.
Author ProfileI'm the owner and Managing Director of Mollan & Co Accountants. I'm a skilled and efficient accountant with more than 20 years of experience in the industry.
I developed valuable skills in commercialisation through my work in the science and technology department at the Scottish University. Then, in 2002, I formed my own internet-based marketing company, producing and distributing 360° virtual reality tours for the Scottish tourism sector.
I now use my commercial skills, expert tax knowledge and first-hand experience to help other businesses grow and flourish through strong accounting practice.
Our success at Mollan & Co is directly related to the success of our clients.
