Making Tax Digital: what you actually need to do.
Short answer: Making Tax Digital for Income Tax replaces your old Self Assessment return with digital record-keeping and four quarterly updates a year, but only once your gross income from self-employment and property crosses a threshold. Miss that threshold and none of this applies to you yet.
HMRC expected around 780,000 sole traders and landlords to be registered by the time it went live in April 2026. By 10 April, only about 219,000 had, fewer than three in ten. If you have not sorted this yet, you are not the only one. Here is the real timeline, what it actually involves, and an honest look at the software, including whether you can get it for free.
The only question that matters first
Does it apply to you, and from when?
It comes down to your qualifying income, your gross turnover from self-employment and property combined, before expenses. The threshold has been stepping down in stages:
| Qualifying income | Mandatory from | Decided by your return for |
|---|---|---|
| £50,000 or more | 6 April 2026 (live now) | 2024/25 |
| £30,000 or more | 6 April 2027 | 2025/26 |
| £20,000 or more | 6 April 2028 | 2026/27 |
| £20,000 or under | Not required for now | — |
The test looks back roughly two tax years. The April 2026 £50,000 check used your 2024/25 return, so a look at last year's figures tells you where you stand today.
Clear of it this year does not mean clear forever. The threshold falls again in 2027 and again in 2028, so a trade doing £35,000 today, safely under the current bar, is in scope the moment the £30,000 line arrives. Worth checking again every year, not a one-off tick box.
Gross, not profit
What counts as qualifying income.
This is the bit that catches people out. Qualifying income is your total turnover from self-employment and property, added together, before you take off expenses. HMRC's own example: £25,000 in rental income plus £27,000 in self-employment turnover is £52,000 combined, over the £50,000 line, even though the profit left after costs might be far lower.
If you jointly own a rental property, only your ownership share counts, so a 50% share of a £50,000 rental adds £25,000, not the full amount. Employment income taxed through PAYE, dividends, pensions and your share of partnership profits as an individual partner are all excluded entirely, only self-employment and property turnover go into the sum.
A trade billing £45,000 in day-rate work with £8,000 recharged for materials is £53,000 combined turnover, over the £50,000 threshold even though it might not feel like a £50,000-a-year business once the materials are paid out again.
What HMRC actually receives
What you actually have to do.
Three parts, and the middle one is smaller than it sounds. Digital records: every entry needs an amount, a date and a category. A spreadsheet is explicitly allowed, HMRC does not require dedicated software for record-keeping itself, provided it is digitally linked to HMRC-recognised “bridging” software before you submit, either through linked cells or a CSV/XML export, rather than retyped by hand.
Four quarterly updates a year, and this is the part that reassures most people once they understand it: HMRC has stated plainly that it does not receive your individual receipts or invoices in a quarterly update, only your running category totals. Standard quarters run to 5 July, 5 October, 5 January and 5 April, each due about a month later, or you can fix a calendar-quarter pattern instead before your first submission.
One Final Declaration after the tax year ends, still due by 31 January, replacing your old Self Assessment return. You confirm the cumulative figures from your four updates, add anything Making Tax Digital does not cover, and claim your reliefs and allowances there, same as before, just at the end of the process instead of being the whole process.
Miss a deadline
The penalty points system.
It is not one fine per late submission. You pick up one penalty point per missed quarterly update or return, and only once you reach four points does a £200 fixed penalty land, with a further £200 for every missed deadline after that. Points expire 24 months after the miss, provided you stay under the four-point line. Reach it, and clearing it takes twelve straight months of on-time submissions with nothing outstanding from the previous two years.
The one-year grace period
For the 2026/27 tax year, HMRC will not issue penalty points for a late quarterly update, though submitting them is still a legal requirement. That grace period does not cover the Final Declaration: a late 2026/27 declaration, due 31 January 2028, still earns a point.
Late payment is separate and scales with time: for 2026/27, nothing up to day 15, 3% at day 15, a further 3% at day 30, then 10% a year charged daily from day 31. From 2027/28 those day-15 and day-30 rates each rise to 4%.
Not everyone is caught
Are you exempt?
Under £20,000 qualifying income keeps you out automatically, no application needed. A handful of other automatic exemptions exist too: no National Insurance number before the tax year starts, and a few role- or relief-specific cases such as Married Couple's Allowance where one partner was born before 6 April 1935.
The one exemption you have to apply for is digital exclusion, genuine age, disability, religious belief or no reliable internet access. HMRC is explicit that not being confident with computers or simply preferring paper is not accepted on its own. Apply by phone or post with your National Insurance number and a written explanation, and HMRC aims to respond within 28 days.
The comparison no vendor blog will give you
Free vs paid software, honestly.
HMRC keeps a list of recognised software and endorses none of it. Every vendor's own page only talks about its own product, so here is where the five names you will actually see genuinely land on cost:
| Software | Genuinely free? | Paid price | Best for |
|---|---|---|---|
| ClearBooks | Yes, no cap, no time limit | from £5/mo +VAT for extras | anyone who just wants free, no strings attached |
| FreeAgent | Yes, via NatWest/RBS/Ulster Bank (just hold the account) or Mettle (1+ transaction/mo) | £19/mo (or a 6-month half-price intro) | already banking with one of those, or willing to switch |
| Sage Sole Trader | Capped: 5 invoices + 25 categorised transactions a month | around £7/mo +VAT uncapped | very low invoice volume |
| QuickBooks / Xero | No free tier, promo discounts only | roughly £10-£16/mo +VAT | already using one for other reasons |
ClearBooks is the one genuinely free option for everyone, no conditions attached. If you already hold a NatWest, Royal Bank of Scotland or Ulster Bank business current account though, FreeAgent is free for as long as you keep the account open, full invoicing included. On a Mettle account it is free too, provided you make at least one transaction a month. Worth a look before paying for anything else. (That link is our referral link. If you sign up through it, we get a small reward, at no extra cost to you.)
Whichever you pick, check it against HMRC's own recognised-software list before you commit, the requirements do shift as HMRC rolls the next threshold in.
The connection nobody else makes
The payments on account trap.
This is not a Making Tax Digital rule, it is a separate Self Assessment mechanic, but it lands on the same sole traders at the same time, and none of the guides on this topic connect the two. Once your tax bill goes over £1,000, HMRC collects half of next year's estimated bill in advance, alongside this year's balancing payment, in January, then the other half in July.
For a trade crossing the £50,000 threshold and turning a genuine profit for the first time, the January bill can land at roughly one and a half times what was actually owed for the year just gone, the balancing payment plus the first advance instalment. It is the single most common tax shock a growing sole trader hits, and it arrives in the same conversation as getting MTD-ready.
You can apply to reduce the advance payments online or on form SA303 if you genuinely expect to earn less next year, HMRC recalculates both instalments and refunds anything overpaid. Cut it too far below what you actually end up owing, though, and interest runs on the shortfall from the original due date, so it is worth doing on a real estimate, not a hopeful one.
The rest of running the business properly
Making Tax Digital is one square on the board.
Getting your books MTD-ready is the same kind of job as getting properly insured, a box-ticking exercise that only pays off once a customer or HMRC actually checks it. We cover the insurance side, what is legally required versus what is just expected, in what insurance do tradesmen need? And if the admin is sorted but you are still weighing up whether a proper website is worth having at all, or what one actually needs to include to win the job, those honest breakdowns are in do I need a website? and what makes a good trade website? If you have not settled whether you should even be a sole trader or a limited company yet, the real 2026/27 numbers, not the vague breakeven range still doing the rounds, are in sole trader or limited company? And if a customer is sitting on an unpaid invoice while you are getting your books straight, work out exactly what they owe you in our late payment interest calculator.
Straight answers
Questions people actually ask.
- Do I need a separate bank account for Making Tax Digital?
- No, there is no legal requirement for a sole trader to hold a separate business account. It is strongly recommended in practice, because mixing personal and business transactions makes digital record-keeping and your quarterly updates far harder to get right.
- Can I do Making Tax Digital myself, without an accountant?
- Yes, if your affairs are straightforward: one trade, ordinary expenses, and you already file your own Self Assessment. You will need HMRC-recognised software. More complex situations, several income sources, or property and trade income combined, are where an accountant still earns their fee.
- How much will Making Tax Digital actually cost me?
- It can be £0. ClearBooks offers a genuinely free, uncapped tier, and FreeAgent is free for as long as you hold a NatWest, Royal Bank of Scotland or Ulster Bank business current account, or a Mettle account with at least one transaction a month. Otherwise, budget roughly £5 to £19 a month depending on the software, plus any accountant fees if you keep one.
- Will HMRC tell me if I need to start?
- HMRC is writing to people it thinks are likely in scope, but do not rely on a letter arriving. If your qualifying income crosses the threshold, you are required to comply whether or not HMRC has contacted you.
- Do all self-employed people have to go digital?
- No, only once your qualifying income crosses the relevant threshold for your tax year. £20,000 or under stays outside Making Tax Digital under the current rules.
- What is the difference between a quarterly update and my old Self Assessment return?
- A quarterly update is a running total by category (sales, materials, and so on), sent four times a year. HMRC has been explicit that it does not receive individual receipts or invoices, only the totals. Your Self Assessment return is replaced by a Final Declaration after the tax year ends, still due by 31 January, where you confirm the cumulative figures and claim any reliefs.
- Can I keep using a spreadsheet?
- Yes. HMRC explicitly allows a spreadsheet as your digital record, provided it is linked to bridging software before you submit, either through linked cells or a CSV/XML export. Once a record has been sent in a quarterly update you should not go back and manually move it between systems.
- Why is my tax bill in January higher than what I actually owe for the year?
- That is payments on account, not Making Tax Digital. Once your Self Assessment bill goes over £1,000, HMRC collects half of next year’s estimated bill alongside this year’s balancing payment in January, then the other half in July. It catches out a lot of newly-profitable sole traders because the January bill can land around one and a half times what they actually owe for the year just gone.
Books sorted. Now make sure the website looks the part too.
Getting properly organised behind the scenes only pays off if the front of your business matches it. Tell us about your trade and we'll build you a website that looks as sorted as your books now are. Got a question first? Just message us.