Making Tax Digital: what's changing for sole traders and trade businesses?
29 October 2026Posted by:
Viveka Alvestrand
Content Marketing Manager, Trade Direct Insurance
Making Tax Digital is changing how some tradespeople keep business records and report their income to HMRC. Here's who it affects, when the rules apply and the important dates to know.
Making Tax Digital: what's changing for sole traders and trade businesses?
If you run a trade business, keeping track of what you earn and spend is part of the job. From customer payments and invoices to materials, tools and fuel, there's plenty to account for throughout the year.
The way some of that information is recorded and sent to HMRC is changing in stages. When the new rules apply depends on how your business is set up and how much income you earn.
It's part of Making Tax Digital (MTD), a government programme run by HM Revenue & Customs (HMRC) to modernise the tax system and reduce errors.
MTD already applies to VAT-registered businesses, unless they're exempt. Since April 2026, it's also applied to eligible sole traders with qualifying income over £50,000. Those above lower income thresholds are due to follow in 2027 and 2028.
If you run your trade business through a limited company, the new Income Tax rules don't apply to the company's trading profits. However, MTD for VAT may already apply.
So, what does Making Tax Digital mean for your business, when do the rules apply and what actually changes?
What is Making Tax Digital?
Making Tax Digital is HMRC's programme to move more tax record-keeping and reporting online.
It's designed to reduce errors and help keep tax information more accurate and up to date.
If you're a sole trader, you're probably familiar with Self Assessment (link to: https://www.gov.uk/browse/tax/self-assessment). You keep track of what your business earns and spends, then include those figures in your annual tax return.
MTD takes that process further.
Once the new Income Tax rules apply to you, there are three main requirements:
• Digital records: You'll have to keep digital records of your business income and expenses using MTD-compatible software. These could include payments for completed jobs, invoices from suppliers, materials purchased and fuel costs.
• Quarterly updates: You'll have to send HMRC a summary of your recorded income and expenses every quarter, using figures from your digital records.
• Annual tax return: You'll still complete a tax return each year, but you'll submit it through MTD-compatible software rather than HMRC's existing online Self Assessment service.
MTD-compatible software helps you keep digital records and send information to HMRC. You may be able to use one software package for everything or a combination of compatible tools. There are also options that work with existing spreadsheets.
Keeping your business figures up to date may also make it easier to track spending and plan purchases throughout the year.
One important thing to know: MTD doesn't mean paying Income Tax every quarter. The existing Self Assessment payment timetable stays the same, including payments on account where applicable.
Does Making Tax Digital apply to your trade business?
That depends on how your business is set up and how much income you earn.
For sole traders, HMRC is introducing MTD for Income Tax in stages. Your start date depends on your qualifying income from an earlier tax year.
This generally means your turnover before business expenses, plus any qualifying income from property you rent out.
Here's what the different thresholds mean for you as of October 2026.
| Your qualifying income | When MTD starts | What this means for you |
| Over £50,000 in 2024/25 | 6 April 2026 | Digital record-keeping and quarterly updates apply from the 2026/27 tax year, unless you're exempt. |
| Over £30,000 in 2025/26 | 6 April 2027 | Your existing Self Assessment arrangements continue until the new requirements begin. |
| Over £20,000 in 2026/27 | 6 April 2028 | Your start using MTD for Income Tax from April 2028. |
| At or below the relevant threshold. |
Not required under that phase based on that income. | Your usual Self Assessment arrangements continue where applicable. |
These dates apply to eligible individuals who aren't exempt and haven't already started using MTD for Income Tax.
If your income doesn't exceed the threshold for the relevant year, you don't have to join under that phase. Your usual Self Assessment arrangements continue unless MTD applies to you later.
Already using MTD for Income Tax? You can find the upcoming quarterly deadlines further down.
What if you run a limited company?
If you operate your trade business through a limited company, MTD for Income Tax doesn't apply to the company's trading profits.
Limited companies pay Corporation Tax on their taxable profits, which has separate reporting requirements.
However, VAT-registered limited companies generally already have to use MTD for VAT, unless exempt.
You could also be personally affected by MTD for Income Tax if you earn qualifying income from self-employment or property outside your company. For example, you might run a separate sole trader business alongside your limited company.
What counts as qualifying income?
For sole traders, qualifying income is generally based on turnover before business expenses are taken off.
Here's how that works.
Say you're a self-employed electrician and your business brings in £38,000 during the 2025/26 tax year.
You spend £12,000 on materials, fuel and other business costs.
That leaves £26,000 before tax.
But for Making Tax Digital, HMRC generally looks at the £38,000 turnover, not the £26,000 left after expenses.
That puts you above the £30,000 threshold for starting MTD in April 2027, assuming you meet the other eligibility criteria.
HMRC has specific rules for some circumstances, including how VAT is treated and income from jointly owned properties. Its qualifying income guidance explains these in more detail.
What if you earn money outside your trade?
Your trade income isn't necessarily the only income HMRC considers.
For example, if you also rent out a property, that income generally counts towards your qualifying income.
Say your plumbing business brought in £28,000 during 2025/26 and you received another £8,000 in rental income.
Your qualifying income would then be £36,000, putting you above the threshold for April 2027, assuming you meet the other requirements.
Income from employment taxed through PAYE doesn't count towards qualifying income. Neither does your share of partnership profits received as an individual partner.
HMRC's qualifying income guidance explains how different income sources are treated.
How do quarterly updates work?
Once you're using MTD for Income Tax, you'll have to send HMRC a summary of your business income and expenses every quarter.
These updates aren't separate tax returns. They're based on the figures recorded in your digital accounts.
For example, if you're a self-employed plumber, your records might include payments for completed installations, materials bought for jobs and business vehicle costs.
Your compatible software uses those records to prepare the update.
Each update covers your figures from the beginning of the tax year, not just the latest three months.
So your second update includes the first six months of the year. Any corrections to earlier figures can also be reflected.
You'll still complete an annual tax return, and your usual Income Tax payment dates remain unchanged.
HMRC allows different quarterly reporting periods depending on your accounting arrangements, but the deadlines for submitting updates stay the same.
Already using MTD? Here are your next deadlines
If your qualifying income was over £50,000 in 2024/25, the new Income Tax requirements started applying in April 2026, unless you're exempt.
Your first quarterly update was due by 7 August 2026.
The remaining deadlines for the 2026/27 tax year are:
| Deadline | What's due |
| 7 November 2026 | Second quarterly update |
| 7 February 2027 | Third quarterly update |
| 7 May 2027 | Fourth quarterly update |
| 31 January 2028 | Annual tax return for 2026/27 through MTD software |
There's also an overlap between the old and new arrangements during your first year.
Your 2025/26 Self Assessment return still follows the existing process, because it covers the tax year before MTD started applying to you.
That return is due by 31 January 2027.
Your first annual tax return through MTD software covers 2026/27 and is due by 31 January 2028.
So, during the changeover, you'll be sending quarterly updates for your current tax year while completing the previous year's return in the usual way.
Starting MTD in 2027 or 2028? What happens until then?
If your qualifying income was over £30,000 in 2025/26 and you haven't already started using MTD, you'll generally have to join from 6 April 2027, assuming you meet the other eligibility rules.
Until then, your usual Self Assessment arrangements continue.
For example, if you're starting in April 2027:
• Your 2025/26 Self Assessment return is due by 31 January 2027.
• You'll begin keeping digital records for MTD from April 2027.
• Your first quarterly update is due by 7 August 2027.
• Your 2026/27 Self Assessment return still follows the existing process, with a deadline of 31 January 2028.
For sole traders starting in April 2028, the changeover follows the same pattern one year later.
The important thing to remember is that HMRC uses income from an earlier tax year to decide when the new requirements begin.
Will you have to change the way you keep your accounts?
That depends on how you manage your records now.
If you already use accounting software for invoices, payments and business expenses, some of the groundwork may be in place. The important detail is whether your software supports MTD for Income Tax.
If you haven't moved to digital record-keeping and still use spreadsheets, paper receipts or handwritten records, there are different ways to meet the requirements.
What if you currently use paper records or spreadsheets?
If you keep receipts in a folder or write down payments in a notebook, you'll have to start recording the required information digitally once MTD applies to you.
You'll still have to keep supporting documents, such as invoices, receipts and bank statements, or copies of them. But keeping those documents on paper alone won't meet MTD's digital record-keeping requirements.
If you already use spreadsheets, you may be able to continue with them using compatible bridging software.
Bridging software connects your spreadsheets to HMRC's system, provided your records and digital links meet the requirements.
Do you have to buy new software?
Not necessarily.
HMRC lists free and paid software that works with MTD for Income Tax.
Some existing accounting packages already support the requirements.
Software that works with MTD for VAT isn't automatically compatible with MTD for Income Tax, so it's worth checking the features of your existing package.
HMRC's software finder lists available options and explains what they can do.
Can job management software help?
If you already use digital tools to manage jobs, quotes and invoices, some of that information can also be useful for keeping your accounts organised.
For example, TradeHelp offers job management tools for tradespeople and is a Trade Direct Insurance partner.
TradeHelp PRO offers connections with Xero and QuickBooks, allowing customer invoices to be exported directly to those accounting packages.
These features can reduce the amount of information you enter more than once and help keep your job records and business accounts connected.
Trade Direct Insurance customers can also access a special TradeHelp PRO trial offer, subject to the offer terms. You can find the details on our Special offers page.
While job management software can help with everyday admin, it doesn't necessarily replace MTD-compatible accounting or tax software. The software you use for MTD must meet HMRC's requirements.
Can your accountant still handle your tax?
Yes, absolutely. An authorised accountant or tax agent can continue managing your tax reporting and submissions under MTD.
What may change is how often they receive your business records and which software you use together.
For example, if you normally hand over all your invoices and receipts once a year, the quarterly updates may mean sharing that information more regularly.
Your accountant can explain how the requirements apply to your business and whether your existing bookkeeping arrangements need to change.
What about penalties and exemptions?
HMRC has introduced new penalties for late submissions and tax payments under Making Tax Digital.
For people required to use MTD from April 2026, there are no penalties for late quarterly updates during the 2026/27 tax year.
The updates are still compulsory and must be completed before you can submit your annual tax return.
From 2027/28, late quarterly updates can result in penalty points.
Reaching the penalty threshold can lead to a financial penalty.
Penalties can still apply to late annual tax returns and overdue tax payments during your first year of MTD.
Some people are exempt from MTD, including those who can't reasonably use digital technology because of their circumstances.
HMRC has more information about penalties and exemptions.
What are the key things to remember about MTD?
Making Tax Digital is being introduced in stages, so not every trade business has the same requirements or start date.
The main things to keep in mind are:
• Check which rules apply to your business. MTD for Income Tax affects eligible sole traders and people with qualifying property income.
Limited companies have different rules for their trading profits. HMRC has an online tool to help you check whether the requirements apply to you and when you may need to start.
• Know your start date. It depends on your qualifying income from an earlier tax year, not just what you're earning now.
• Understand how your records will be managed. Compatible software is required, but there are different options depending on how you already keep your accounts.
• Remember that quarterly updates aren't quarterly tax payments. You'll still complete an annual return and follow the existing Income Tax payment timetable.
HMRC is contacting people required to use MTD, but eligibility depends on your income and circumstances, not simply whether you've received a letter.
For more information, HMRC has a step-by-step Making Tax Digital guide.
Disclaimer: This article is based on publicly available information and was correct to the best of our knowledge at the time of publication in October 2026. It is intended for general information only and does not constitute tax or financial advice. Tax rules and requirements can change, and Trade Direct Insurance cannot accept responsibility for any decisions made or actions taken based on the information provided. Always check the latest guidance on GOV.UK or speak to a qualified tax professional about your individual circumstances.
About the Author
Viveka Alvestrand
Content Marketing Manager, Trade Direct Insurance
Viveka Alvestrand is an experienced content and digital marketing professional with a background in editorial strategy, brand storytelling and multi-channel communications.
Trade Direct is authorised and regulated by the Financial Conduct Authority. The company is a leading UK independent broker providing a wide range of policies to tradesmen and construction workers.
This note is not intended to give legal or financial advice, and, accordingly, it should not be relied upon for such or regarded as a comprehensive statement of the law and/or market practice in this area. In preparing this note we have relied on information sourced from third parties and we make no claims as to the completeness or accuracy of the information contained herein. You should not act upon information in this bulletin nor determine not to act, without first seeking specific legal and/or specialist advice. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide herein and exclude liability for the content to fullest extent permitted by law.