Making Tax Digital for Small Businesses: A Plain-English Guide
Making Tax Digital is the UK government programme that replaces annual, paper-style reporting with digital records and regular updates. For Income Tax, it applies to sole traders and landlords whose qualifying income is above set thresholds. If you are in scope, you keep digital records, send quarterly updates through compatible software and make a final declaration at the year end.
Key takeaways
- Making Tax Digital for Income Tax applies to sole traders and landlords based on qualifying income, which is gross income rather than profit.
- The phase-in thresholds are over £50,000 from April 2026, over £30,000 from April 2027 and over £20,000 from April 2028.
- Digital records must be kept in compatible software, and quarterly updates replace a single annual summary for in-scope income.
- Because the test uses gross takings, a business with high sales and high costs can be in scope even with a modest profit.
- Exemptions exist for people who cannot reasonably use digital tools, and you must apply through HMRC rather than assume you qualify.
- Preparing early means choosing software, tidying your records and agreeing with your accountant who does what.
What is Making Tax Digital, and why does it matter?
Making Tax Digital is HMRC's plan to make tax reporting digital from start to finish. Instead of keeping records loosely and sending one annual return, in-scope taxpayers keep records in digital form and send updates to HMRC through software that connects to its systems. The aim is to reduce errors, give taxpayers a more up-to-date picture of their position and make the process more consistent.
For sole traders and landlords, the change means regular discipline rather than a once-a-year scramble. It affects how you record income and expenses, how often you check them and which software you use. It does not change the basic idea of tax: you still report what you earn and pay what you owe. Making Tax Digital is about how the information gets to HMRC.
Making Tax Digital already applies to VAT, so many businesses have been keeping digital records for that purpose for some time. Income Tax is the next step, and the principles are similar, so the habits you build for VAT will carry across.
The move also changes the quality of information. HMRC receives figures closer to real time, which can reduce the chance of an unexpected bill at the end of the year. For you, the main benefit is discipline: small, regular checks instead of one large reconciliation in the new year. That discipline is worth building whether or not you are in scope yet.
Who has to join, and when does it start?
Making Tax Digital for Income Tax is phased in by qualifying income. Each phase has a start date and a threshold, and the threshold tests your gross income from self-employment and property. Check which phase applies to you before the date, and check GOV.UK for the current position because rules can be updated.
| Start date | Qualifying income threshold | Who is affected |
|---|---|---|
| April 2026 | Over £50,000 | Sole traders and landlords above this level |
| April 2027 | Over £30,000 | Sole traders and landlords above this level |
| April 2028 | Over £20,000 | Sole traders and landlords above this level |
Because the phases are staggered, you may not be affected in the first year, but that does not mean you can ignore it. If your income grows, you may move into a later phase, and it is better to prepare early than to find out in a hurry. If you run a sole trader business alongside other income, take advice on how each stream counts toward the threshold.
To work out your figure, add together all gross receipts from self-employment for the relevant year, then add gross rent if you have property income. Keep a note of which receipts belong to which category, and do not net off costs. If you are unsure which figure HMRC will use, ask your accountant to confirm the basis before your start date rather than guessing.
What counts as qualifying income?
Qualifying income is your gross income from self-employment and property, before deducting expenses. It is not your profit. This is the detail most people miss, and it matters because a business with high sales and high costs can be in scope even when its net profit is modest.
For a sole trader, gross income usually means what you have invoiced or received for business work over the relevant period, before costs. For a landlord, it means rent and other property income before expenses. Some categories and special cases need careful treatment, so use the GOV.UK guidance and check any figures with an accountant before relying on them.
If you have a mix of income types, the test looks at the combined qualifying income for the relevant tax year. Keep the categories separate in your records so the figures are easy to add up when you need them.
What do digital records and quarterly updates involve?
Under Making Tax Digital, you keep digital records of income and expenses, send quarterly updates that summarise them, and then make a final declaration at the year end. The quarterly updates are summaries rather than full transaction detail, but the records behind them must be complete. The steps look like this:
- Choose compatible software that can keep your records and send updates to HMRC. HMRC publishes a list of compatible products on GOV.UK.
- Connect the software to your bank accounts or enter transactions regularly, so the records stay current rather than being reconstructed later.
- Categorise each income and expense item correctly, and keep receipts or digital copies that support them.
- At the end of each quarter, review the figures and submit the quarterly update through the software.
- After the year ends, submit the final declaration confirming your income and any other items, then pay what you owe by the deadline.
Quarterly updates do not replace the need to think about your tax, but they make errors visible earlier. Set a monthly reminder to reconcile your bank account, because a quarter's worth of unchecked entries can take a long time to unpick.
Keep a separate record of drawings, which is the money you take out of the business for personal use. Drawings are not business expenses, and mixing them into your cost totals is a common error that distorts both your profit and your updates. Record each transfer to your personal account with a clear note, and reconcile the total at the end of each quarter.
Can you use spreadsheets, and what software is compatible?
You can use spreadsheets in some setups, but only where the spreadsheet is connected to HMRC through compatible bridging software. A spreadsheet on its own will not send updates. Check the list of compatible software on GOV.UK, because products and features change over time.
When you choose software, look for these points rather than brand names:
- It records income and expenses and categorises them for self-employment and property
- It connects to your bank or lets you import transactions easily
- It submits quarterly updates and the final declaration to HMRC
- It keeps an audit trail of changes you make to records
- Support is available if you get stuck during a submission
Cost and ease of use matter, but the most important test is whether you will actually keep the records up to date. The best tool is the one you will use every week, not the one with the longest feature list.
Before your start date, test the software with a previous quarter. Run the same figures through the system, compare the totals with your existing records and check where any differences come from. Also find out how the software handles corrections to a submitted update, because a clear correction route saves a great deal of stress when something has been entered wrongly.
How should you prepare before your join date?
Preparation is mostly about habits and data quality. Start the process several months before your start date, rather than during the first quarter you are in scope. Use this checklist as a starting point.
- Check whether your qualifying income puts you in scope for the next phase and when that phase starts
- Clean up your current records so every income and expense has a date, description and amount
- Collect receipts and invoices for the last tax year, and decide how you will store digital copies
- Pick software and test it with a few months of past transactions
- Agree with your accountant who will submit updates and who checks them
- Set quarterly calendar reminders that match HMRC's reporting periods
If you already use an accountant, ask them to walk you through their process and the software they recommend. If you do not, read the Making Tax Digital guidance on GOV.UK and set aside time to test the software before it matters.
Think about who will do the work before the start date arrives. If you do your own bookkeeping, plan regular time for it in your week, because quarterly updates are only as good as the records behind them. If an accountant handles it, agree how often you will send them receipts and bank feeds, and what happens if a batch of information arrives late. Clear roles prevent the common situation where each side assumes the other has done the checking.
Are there exemptions, and how do you apply for one?
Some people can be exempt from Making Tax Digital for Income Tax. HMRC's exemptions cover situations where it is not reasonable to expect you to use digital tools, such as certain circumstances linked to age, disability, a lack of internet access or a genuine religious objection. The rules are specific and you must apply, so do not assume you qualify.
If you think you may be exempt, check the criteria on GOV.UK and keep evidence of your circumstances. Keep your records going while any application is considered, because the position should be confirmed in writing before you stop. If you are unsure of your position, speak to HMRC or an accountant rather than waiting to see what happens.
How does Making Tax Digital fit with the rest of your tax?
Making Tax Digital works alongside Self Assessment, VAT and any other tax duties you have. If you are also VAT registered, you will already be using digital records for VAT, which makes Income Tax easier to adopt. If you run a company as well as a sole trader business, the company's own filings follow different rules.
Scotland and Northern Ireland use the same Making Tax Digital framework for Income Tax as England and Wales, but Scotland sets its own Income Tax bands, so the figures you calculate will reflect where you live. Check the rules that apply to your situation on GOV.UK before you submit anything.
If you let property, the same gross-income test applies to your rental income, and rent counts before expenses are taken off. Many landlords also hold a mix of property and self-employed income, so keep the two in separate records and check how each is reported before the first quarterly update.
What should you do next?
Work out which phase you fall into, choose your software and agree the division of work with your accountant. Keep the records tidy from today, and review your position each year as your income changes. If you need help, browse accountants and compare how they handle quarterly updates and software set-up.
Software set-up sometimes needs IT help as well, so computer services providers may be useful if your bookkeeping system is complex. UKListingz lists businesses by category and town so you can compare options, but listings are supplied by businesses and users and do not confirm any qualification or accreditation. Check membership of professional bodies yourself, and browse all categories when you need a different kind of help.
For the wider picture of registering and running a sole trader business, read our guide on how to register as a sole trader, and see the VAT registration guide if your turnover may pass the threshold.
Frequently asked questions
Do I need to join Making Tax Digital if I already file a Self Assessment return?
Only if you are in scope based on your qualifying income and the phase that applies to you. If you are in scope, you move from a single annual return to digital records and quarterly updates, with a final declaration at the year end. Being in scope does not mean you pay more tax. It changes how and when you report, so check the thresholds on GOV.UK and plan the change before your start date.
Can I keep my records in a spreadsheet for Making Tax Digital?
A spreadsheet can be used in some setups, but it must connect to HMRC through compatible bridging software that submits your quarterly updates. A spreadsheet on its own cannot send the updates. Look up the compatible software list on GOV.UK, test any setup with past figures and make sure you understand how the data moves between the spreadsheet and the software before you rely on it.
What happens if I miss a quarterly update?
HMRC has penalty rules for late updates and late submissions. The current rules are set out on GOV.UK and can change, so check them before you assume how a missed deadline will be treated. If you miss an update, submit it as soon as you can, record why it happened and speak to an accountant about the best way to deal with it.
Does Making Tax Digital apply to limited companies?
Not in the same way. Making Tax Digital for Income Tax is aimed at sole traders and landlords, while limited companies report through Corporation Tax returns. A company may still use digital records and compatible software for its own accounts, and other digital filing rules may apply, so check Companies House and HMRC guidance for the current position on your company.
Who checks that my software is compatible?
You do, using HMRC's list of compatible products on GOV.UK. Software is updated and features change, so check the list again before each phase starts. If you use an accountant, ask them to confirm that the software they recommend is on the list and to show you how a quarterly submission works from start to finish.
What happens if my income falls below the threshold later?
The thresholds are tested against your qualifying income, and the rules set out when you come into scope and when you leave it. Do not assume you have left the scheme because one year was lower. Check the current GOV.UK guidance each year, keep your digital records going while you are unsure, and talk to an accountant if your income changes sharply.
Sources and further reading
- Making Tax Digital (GOV.UK) – official guidance on Making Tax Digital for Income Tax and VAT, including phase-in dates.
- Register for Self Assessment (GOV.UK) – how to register and what your filing route looks like.
- HM Revenue and Customs (GOV.UK) – HMRC's guidance hub and contact points.
- Federation of Small Businesses – guidance and support for small businesses across the UK.
This article is general information, not legal, financial or professional advice. Rules and prices change, so check the official sources above before you act.