QUESTION: I operate as a sole trader and am wondering if the upcoming introduction on Making Tax Digital will impact how I operate my business and pay my taxes?
ANSWER: For sole traders in the UK, the introduction of Making Tax Digital for income tax self-assessment (MTD for ITSA) represents a significant shift in how taxes are reported and managed.
Starting in April 2026, businesses with an income over £50,000 will need to comply with MTD rules, with those earning over £30,000 following suit in April 2027. If you’re a sole trader, here’s what you need to know and implement to ensure compliance with the new system.
MTD for ITSA is designed to streamline tax reporting and make the system more accurate. Instead of filing one annual self-assessment tax return, you’ll need to keep digital records of your income and expenses, submit quarterly updates and end of period statement to HMRC through compatible software and submit a final declaration to confirm your total taxable income and any other adjustments.
For sole traders, this means moving away from paper-based record-keeping or basic spreadsheets to a fully digital system.
One of the most critical steps for compliance is selecting software that meets HMRC’s MTD requirements. When choosing software, consider how easy it is to use, the cost for the annual subscription and the support offered by the provider.
If you’re unsure where to start, HMRC’s website provides a list of approved software vendors.
Once you’ve chosen your software, you’ll need to begin maintaining accurate digital records of all your business transactions. This includes recording all income, payments received, logging expenses and keeping digital copies of receipts and invoices.
Organising your records digitally will not only ensure compliance but also make it easier to track your financial performance.
MTD for ITSA requires sole traders to submit quarterly updates to HMRC. These updates provide an overview of your income and expenses, giving you a clearer picture of your tax liabilities throughout the year.
You will need to ensure you are able to operate the software sufficiently to complete these obligations.
While quarterly updates reduce the burden of a single, annual tax return, you’ll still need to submit an end of period statement (EOPS) at the end of the tax year. This process involves confirming the accuracy of your records and making any necessary tax adjustments, such as claiming allowances or reliefs. Your final declaration will confirm your total income and tax due for the year.
Although the deadlines for MTD for ITSA may seem far away, it’s important to start preparing now. Transitioning to digital accounting takes time, especially if you’re new to using software or need to update your record-keeping practices.
Making Tax Digital for income tax is a significant change, but with the right tools and preparation, sole traders can adapt successfully. By understanding the requirements, choosing compatible software, and keeping accurate digital records, you can ensure compliance while also gaining better visibility into your business’s finances. Starting early will give you the confidence and clarity to embrace this new way of managing your tax affairs.
If you’re unsure about the transition to MTD, consider seeking advice from an accountant or tax advisor. They can help you select the right software, set up your digital records, and ensure you meet all deadlines.
- Feargal McCormack (feargal.mccormack@aabgroup.com) is managing director at AAB Group Accountants Limited (www.aabgroup.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
