If you’re a sole trader or landlord, Making Tax Digital (MTD) for Income Tax could soon change the way you keep your financial records and report your income to HMRC.
With six months to go until the next stage of Making Tax Digital begins, HMRC is urging affected businesses and landlords to start preparing now. From 6 April 2027, sole traders and landlords with qualifying income of more than £30,000 will need to use Making Tax Digital for Income Tax.
With more than one million additional sole traders and landlords expected to come into the system from April 2027, now is a good time to understand what Making Tax Digital means and what you need to do to get ready.
What is Making Tax Digital?
Making Tax Digital is HMRC’s move towards a more digital tax system. For those affected by MTD for Income Tax, it means keeping digital records of business or property income and expenses and using compatible accounting software to send information to HMRC.
Rather than simply preparing your Self Assessment tax return once a year, you’ll need to keep your records digitally and send quarterly updates summarising your income and expenses. These quarterly updates are not additional tax returns; they are summaries of the information recorded in your software.
You’ll still need to complete a final tax return and pay any tax due in the usual way.
Who needs to use Making Tax Digital?
Making Tax Digital for Income Tax is being introduced in stages.
The next stage begins on 6 April 2027 and will apply to sole traders and landlords with qualifying income of more than £30,000 for the 2025/26 tax year.
The threshold will then reduce further to £20,000 from April 2028, bringing more self-employed people and landlords into the system.
It’s important to understand that the threshold is based on qualifying income, rather than profit. For sole traders and landlords, this means looking at gross income before deducting expenses and tax allowances.
If you’re unsure whether Making Tax Digital applies to you, it’s worth speaking to your accountant before assuming you’re outside the rules.
What do you need to do?
If you will need to use MTD for Income Tax from April 2027, there are several things you can start doing now.
1. Check whether you will be affected
Start by looking at your 2025/26 income from self-employment and property. If your qualifying income is above £30,000, you are likely to fall within the next phase of Making Tax Digital.
There are some exemptions, including for people who are digitally excluded, so individual circumstances should be considered.
2. Choose compatible accounting software
You’ll need software that works with Making Tax Digital for Income Tax. HMRC does not provide the software itself, but maintains information about compatible products.
Depending on your circumstances, you may be able to use an all-in-one accounting package or combine different software solutions. Even businesses currently using spreadsheets may be able to continue doing so with appropriate bridging software.
Choosing your software early gives you time to learn how it works rather than trying to make the change immediately before the deadline.
3. Start keeping digital records
Your income and expenses will need to be recorded digitally using compatible software.
For each transaction, the digital records need to include information such as the amount, date and appropriate income or expense category.
For many businesses, this could actually make managing finances easier. Instead of gathering receipts, invoices and paperwork at the end of the year, your records can be kept up to date throughout the year.
4. Prepare for quarterly updates
Once you’re using MTD for Income Tax, your software will use your digital records to prepare quarterly updates for HMRC.
These are summaries of your income and expenses rather than four separate tax returns. The information can also give you a clearer picture of your finances throughout the year and help you understand your potential tax position.
Is Making Tax Digital a good thing for small businesses?
Although any change to the way you manage your accounts can initially feel like extra work, there are potential benefits to moving towards better digital record keeping.
Having your accounts up to date throughout the year can give you a much clearer view of your business performance and cash flow. It can also make it easier to spot errors, understand your tax position and make better-informed business decisions.
For many sole traders, the biggest change may simply be moving from a once-a-year approach to keeping financial records up to date throughout the year.
How can Accountants247 help?
You don’t need to navigate Making Tax Digital alone.
At Accountants247, we can help you understand whether MTD for Income Tax will apply to you, review your current bookkeeping processes and help you choose an appropriate software solution.
We can also help you get your digital records in order and make the transition to quarterly reporting as straightforward as possible.
Getting started early means there is plenty of time to understand the new requirements, choose the right software and get comfortable with the process before 6 April 2027.
Don’t leave Making Tax Digital until the last minute
April 2027 may still seem a long way off, but HMRC is already encouraging affected sole traders and landlords to prepare. Starting now means you can make the change gradually rather than facing a last-minute rush.
If you’re a sole trader or landlord earning more than £30,000, speak to Accountants247 about getting ready for Making Tax Digital for Income Tax.
We’ll help you understand what’s changing, choose the right approach and make the move to digital tax reporting as simple as possible. Speak to our knowledgable team today here.
