6 ways Making Tax Digital for Income Tax could be good for sole traders

How much do you know about Making Tax Digital? Not much? Doesn’t ring any bells? Well, if you’re a sole trader you should be aware of a few basic facts about Making Tax Digital and take steps to get ready, because big changes may be coming your way.

What is Making Tax Digital?

VAT-registered businesses already need to comply with new Making Tax Digital (MTD) record-keeping and reporting rules. Their introduction began in 2019 and this was extended to all VAT-registered businesses in April 2022.

Making Tax Digital is a major government initiative to digitise the UK tax system. According to HMRC, a key MTD aim is to make tax easier for people and businesses so they can manage tax more successfully and efficiently. The economy should also benefit, because HMRC also believes that MTD will prevent basic taxpayer mistakes that currently cost the UK billions of pounds each year in lost tax revenue.

Who will be affected by Making Tax Digital for Income Tax?

MTD for Income Tax Self Assessment will be introduced from 6 April 2026. This will impact you if you’re a sole trader with taxable gross income from all taxable sources of more than £50,000 a year.

MTD for ITSA exemption may be granted if keeping digital records and submitting data to HMRC digitally isn’t practical, for example, because of your age, disability, location or other justifiable reason.

Need to know! Simply preferring to complete paper tax returns isn’t grounds for MTD exemption and failure to comply with the new Making Tax Digital for Income Tax requirements is likely to result in penalties.

How will tax reporting change under Making Tax Digital for Income Tax

• Under Making Tax Digital for Income Tax you must maintain accurate, up to date digital records of your taxable income and expenses/costs and send summary data electronically to HMRC each quarter (ie every three months).
• At the end of the tax year, you must electronically submit an EOPS (end of period statement) to HMRC, confirming that your figures are accurate, with any accounting adjustments made.
• At that point, you also need to make a final declaration, finalising your figures for the tax year. HMRC will then tell you how much tax you owe, which you must pay by 31 January in the following tax year.

Need to know! You will need Making Tax Digital for Income Tax-compliant software to be able to record and report data or “bridging software”, which works with non-MTD-compatible software (eg basic spreadsheets, etc), so that you can send the required digital data in the right format to HMRC.

Making Tax Digital for Income Tax: Six sole trader benefits

1. More time, easier life

If you’re currently maintaining paper financial records or basic computer spreadsheets, using MTD-compliant bookkeeping software could be a real game-changer that saves you lots of time, freeing you up to get on with other things that you enjoy or that contribute more value to your business. Going digital can make bookkeeping much quicker, easier and less stressful.

2. Lower your tax bill

If you need to report your expenses to HMRC every quarter, you’ll need to record them more often in your bookkeeping software. That means you’re less likely to forget to claim for some business expenses (which can happen if you do it once a year), so your tax bill may even be lower than it would otherwise be.   

3. No more nasty tax bill surprises!

Based on the figures you provide, you’ll get an estimate of how much tax you owe at that point, so you’ll know how much to put away to cover your tax bill and you’ll have it when it comes time to pay. No longer will you be faced with the shock of a tax bill that’s higher than expected or the worry of how you’re going to pay it.

4. Healthier cash flow

Because you’ll need to input income and expenses data data at least each quarter, you’ll get a more accurate, up to date and reliable idea of your business income and outgoings, which could enable you to better control your costs and boost your income to ensure that your cash flow remains healthy.

5. Fewer tax reporting mistakes

HMRC believes that the new Making Tax Digital for Income Tax requirements will lead to sole traders making fewer basic mistakes when reporting tax data. As well as the hassle of having to later correct errors, there can be penalties to pay if the information you report to HMRC isn’t accurate or correct. MTD for ITSA makes that less likely.

6. No more mad panic every January!

It’s a classic scene at the start of every year. Self employed all over the country frantically trying to bring order to piles of bank statements, invoices and sales receipts, as they attempt to work out their sales and expenses for the year, while battling the fast-approaching Self Assessment tax return 31 January online-filing deadline. Who needs that? Making Tax Digital for ITSA could make your January much less hectic.    

We’re busy developing our own Making Tax Digital for Income Tax software, which will help you to comply with HMRC rules.

Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.