Making Tax Digital is set to transform the way in which both individuals and businesses file tax returns and comply with HMRC. For VAT-registered businesses, the changeover to digital taxation has already begun. For sole traders, however, now is the time to prepare: Making Tax Digital for sole traders is coming soon.
This guide presents simple and actionable steps for you to take today, to help ensure compliance with MTD for Self Assessment when it begins. By the end of this guide, you should be all set to adapt seamlessly and reap the benefits of digital tax made easy.
What is Making Tax Digital for Sole Traders?
Making Tax Digital (MTD) is HMRC’s initiative to modernise UK tax. In short, HMRC is phasing in new requirements for taxpayers to keep digital records and file tax returns online (via MTD-compatible software). By doing so, it is hoped that accuracy and efficiency will be improved, benefiting both the UK government and its taxpayers.
Making Tax Digital for sole traders concerns primarily the upcoming introduction of MTD for Self Assessment (MTD for ITSA). With the rollout of MTD for ITSA, sole traders meeting certain criteria will be required by law to file and pay Income Tax online. For sole traders, as well as landlords, the main criterion corresponds to your total taxable income.
The Goals of MTD
It is expected that MTD will benefit both the UK government (HMRC) and taxpayers, such as sole traders. Let’s consider some of the potential advantages:
Improving Accuracy in Tax Reporting
By mandating digital record-keeping, HMRC aims to reduce the risk of manual error. Furthermore, MTD-compatible software can help to minimise errors in tax returns due to support for automated calculations and input validation. Improving accuracy reduces administrative complications and helps taxpayers to avoid issues such as penalties.
Simplifying the Tax Process
When making use of MTD-compatible software, taxpayers can expect a much simpler alternative to paper-based returns. Not only is digital Self Assessment (such as AbraTax) more convenient to access: it also features step-by-step guidance and the ability to save progress along the way.
Rather than needing to juggle multiple tax forms (including supplementary pages), MTD software will automatically work out what you need. As you fill in the digital forms, it will react to your responses and tailor the Self Assessment to your individual circumstances.
This streamlined approach leads to a much simpler, more user-friendly and convenient experience.
Enhancing Efficiency for HMRC and Taxpayers
Increasing the accuracy and simplicity of the tax process leads to significant overall gains in efficiency. First of all, this is advantageous for HMRC as less time will be spent on error-checking and validation of the data submitted. This improved efficiency should also be reflected in a reduction of the so-called “tax gap”, which is a primary concern for the UK government.
Second, and more importantly for the sole trader, the enhanced efficiency should reduce the administrative strain and time needed to comply with tax regulations. This means that more resources can be directed towards keeping business flowing and turning over more income. It might also free up time to spend with friends and family, or to develop more diverse skills.
Third, it is fair to say that increased efficiency for HMRC will also translate into benefit for the wider community. Since the taxation system is directly linked to public funds, a reduction of the tax gap and increased revenue from taxation provides the UK government with more money to invest towards public services (such as the NHS and schools).
Boosting Tax Compliance
Making Tax Digital for sole traders (and MTD in general) provides a simpler and more convenient means for filing Self Assessment. This is combined with highly accessible online guidance and widespread public awareness about the new system. As a result, it is assumed that more taxpayers will be able and willing to keep on top of their tax compliance.
In sum, MTD promises to improve accuracy, streamline tax processes, and reduce the administrative burden of compliance. As a result, taxpayers should feel more confident in submitting tax returns and HMRC will also benefit from increased revenue.
Why MTD Matters for Sole Traders
Since MTD is set to revolutionise the Self Assessment process, it will be relevant to all sole traders who need to submit tax returns. In general, this applies to all sole traders (self-employed people) earning more than £1,000 per tax year (according to HMRC). Accordingly, MTD matters greatly for sole traders, as detailed below:
Legal Compliance
Adhering to HMRC’s upcoming MTD regulations will be mandatory for all criteria-meeting sole traders. As such, it will be essential for sole traders to comply successfully. Failing to comply with MTD could lead to complicated and disruptive legal repercussions. In order to avoid this, sole traders should prepare for MTD in advance and ensure continued compliance.
Improved Financial Management
The advent of Making Tax Digital for Self Assessment ushers in new regulation regarding financial record-keeping. When sole trading, it will be mandatory to keep digital records of all your relevant business details; it will no longer be permissible to keep paper-medium finances.
However, this change is not necessarily a disadvantage: digital record-keeping is less prone to manual error, and it will enable you to track your business’s financial health more conveniently. In the long run, this could aid you with better financial planning and decision-making.
Penalties for Non-Compliance
It is a legal obligation for eligible taxpayers to submit timely and accurate tax forms and payments. As a result, HMRC has the power to levy fines against taxpayers for late submissions. For sole traders under MTD, this will also include compliance with quarterly reports.
Overall, MTD should be fairer and more efficient than the previous system. As long as the necessary preparations are made and compliance is ensured, sole traders can expect to benefit significantly from the changeover.
When Does MTD for Sole Traders Start?
MTD for VAT
MTD for VAT has been in effect since 2019; as of 2022, it is now fully rolled out. Any business (including sole traders) turning over more than the VAT threshold must already be registered for and paying VAT at this stage. Therefore, MTD has begun for some sole traders.
As of April 2024, the VAT registration threshold is £90,000 (subject to changes by HMRC). Therefore, if your self-employment is turning over more than this – or if expect it to do so in the next 30 days – you should already be complying with MTD for VAT.
Future MTD Deadlines
MTD for Income Tax Self Assessment (MTD for ITSA) will apply for many sole traders soon. The rollout is scheduled as follows:
- From April 2026, all sole traders with taxable income exceeding £50,000 will need to comply with MTD for ITSA.
- From April 2027, all sole traders with taxable income exceeding £30,000 will need to comply with MTD for ITSA.
It is unclear when the income threshold will be lowered further, although HMRC states that it will be lowered (at least) to £20,000 at some point. In general, it is important to assume that all regulations are subject to change.
How to Prepare for MTD as a Sole Trader
As described above, MTD for ITSA is imminent for many sole traders. Additionally, there may be further action to widen the scope of MTD for sole traders in future. As such, it is advisable to begin preparations as soon as possible; preparing in advance will help to make the MTD transition as smooth as possible. Here are some points to bear in mind:
Understand Your Obligations
Make sure you are clear on which forms of MTD apply (and will apply later) to you. This might include checking your finances against the current VAT threshold and/or upcoming MTD for ITSA thresholds.
Choose MTD-Compatible Software
Consider which software you might need for compliance with MTD. For MTD for VAT, you might benefit from a simple, low-cost solution such as AbraTax’s VAT bridging software. For MTD for ITSA, it would be beneficial to acquaint yourself with MTD-ready software such as AbraTax’s free Self Assessment service.
Start Keeping Digital Records
A simple way to get ready for MTD is to transition from paper-based bookkeeping to a digital format. This is already mandatory for MTD for VAT and will be mandatory for MTD for ITSA soon. In any case, there are various benefits to maintaining digital records (such as reducing manual error and the ability to create backups easily).
Plan for Quarterly Reporting
Both MTD for VAT and MTD for ITSA require submitting regular updates to HMRC. These are typically due each quarter; failing to send them can lead to penalties. Even if not currently required for your business, it makes sense to begin integrating such practices into your administration (e.g. scheduling bookkeeping reviews every quarter).
How Sole Traders Can Comply with Making Tax Digital: Step-by-Step
Complying with MTD for VAT
If your business exceeds the VAT threshold, then you must comply with MTD for VAT now. This includes:
- Registering your business for VAT
- Maintaining digital financial records
- Submitting regular (typically quarterly) VAT returns to HMRC
- Using MTD-compatible software to submit your VAT returns.
In our opinion, the easiest way to comply is by using bridging software; this allows you to connect your existing Excel spreadsheet finances directly with HMRC’s MTD system.
Complying with MTD for ITSA
As of April 2026, many sole traders will need to comply with MTD for Self Assessment. The number of sole traders required to comply will increase yet again in April 2027. MTD for ITSA compliance includes:
- Registering for MTD for ITSA
- Maintaining digital financial records
- Providing quarterly digital updates to HMRC
- Submitting annual ITSA returns
- Using MTD-compatible software to submit returns
Late submissions
If you manage to keep on top of these requirements, then your MTD experience could be seamless. However, we all know that life can throw unexpected hurdles in our way. At times, it might seem unreasonable or even impossible for you to submit a return or tax update on time. Luckily, HMRC does have provision for extreme circumstances. Check out our article “How to Extend Your Self Assessment Filing Deadline” for details.
Common Challenges and How to Overcome Them
When transitioning to MTD, there are certain challenges you might face. However, they can be overcome. Here are some common scenarios:
Transitioning from Paper to Digital Records
- Challenge: Adapting to digital bookkeeping can be daunting, involving a steep learning curve.
- Solution: Start early and seek support where necessary. Save time by finding simple and user-friendly software.
Choosing the Right Software
- Challenge: Selecting software which is appropriate for your budget and needs.
- Solution: Compare options and consult reviews or professional recommendations. Consider beginning with simple and low-cost solutions such as AbraTax.
Understanding MTD Requirements
- Challenge: Navigating new rules and deadlines.
- Solution: Use HMRC’s resources or hire a professional for advice. For handy summaries and tips, check through our blog.
Maintaining Accurate and Up-to-Date Records
- Challenge: Keeping records current amidst a busy schedule.
- Solution: Try to schedule in regular bookkeeping sessions. Short but regular maintenance can pay off in the long run. Make use of any automation or assistance from relevant software.
Meeting Quarterly Reporting Deadlines
- Challenge: Failing to meet deadlines through lack of organisation/preparation.
- Solution: Set calendar reminders or software-based notifications. Consider using straightforward and user-friendly MTD-compatible software to save time.
How AbraTax Makes MTD Easy for Sole Traders
Our bespoke VAT and Self Assessment software is designed with sole traders in mind:
AbraTax for VAT: MTD Bridging Software
For VAT-registered sole traders, we provide simple and low-cost VAT bridging software. This allows you to connect your existing digital records (in Excel) with HMRC’s VAT system.
AbraTax’s MTD Excel bridging software offers:
- Simple, cheap compliance (starting from £8/month on an annual plan)
- Long-term compatibility (HMRC-recognised, MTD-compliant service)
- Ability to add and track multiple VAT registrations
Compliance with MTD for VAT via AbraTax takes only three short steps:
- (1) Download the AbraTax Excel template
- (2) Digitally link nine Excel cells to the template
- (3) Re-upload the template to file your VAT return
AbraTax for Self Assessment
As a sole trader, it is likely that you already submit annual Self Assessment returns. AbraTax currently offers a free and user-friendly service to make this process even easier. Our service boasts:
- No cost (currently free; we encourage user feedback in return)
- Error-checking (automatic validation of input)
- Free tax calculation (built into the dashboard)
- Multiple returns (to manage multiple users in one place)
- Step-by-step guidance
Since AbraTax is an HMRC-recognised and MTD-compatible service, you can trust us to keep on top of HMRC’s latest regulations. We also support HMRC’s supplementary forms, meaning that your Self Assessment return will be tailored specifically to your circumstances.
If you want to be ready for MTD for ITSA, it makes sense to register with us and start submitting your Self Assessment via AbraTax today. By choosing our services, you can save time, reduce errors, and stay ahead of compliance requirements.
Conclusion
Making Tax Digital for sole traders is an essential step in the evolution of UK taxation. By understanding your obligations and preparing in advance, you can ensure compliance. In the process, you can take advantage of improved administrative efficiency and clearer finances. Complying with MTD doesn’t have to be overwhelming: with the proper tools and guidance, it can be a smooth process.
If you’re ready to simplify your tax obligations, register with AbraTax today and take your first step towards effortless compliance.