Making Tax Digital (MTD) is HMRC’s flagship initiative to modernise the UK tax system through digitalisation. It’s part of a broader push to reduce tax errors, simplify the filing process, and make managing your tax obligations easier, faster, and more transparent.

The next significant step in this journey is Making Tax Digital for Income Tax Self-Assessment (MTD ITSA). If you’re a sole trader or landlord, this is a significant change that could impact how you manage your finances, software, and even your business structure.

From April 2026, specific individuals will be required to keep digital records and submit quarterly updates to HMRC. If you fall into this group, now is the time to understand what’s coming and how best to prepare.

What Is Making Tax Digital?

Making Tax Digital is a government programme launched by HMRC to shift the UK tax system into the digital age. Its core goals are:

• Reducing tax errors by moving away from manual and paper-based processes
• Encouraging better record keeping through the use of compliant accounting software
• Providing real-time data so taxpayers know what they owe throughout the year
• Making tax administration more efficient for both HMRC and taxpayers

It began in April 2019 with the introduction of Making Tax Digital (MTD) for VAT, which required VAT-registered businesses to file their VAT returns digitally. Now the focus is on income tax, with MTD ITSA representing the most significant change to personal tax since self-assessment was introduced in the 1990s.

Key Dates for MTD ITSA

The rollout of MTD ITSA is being phased in, starting with higher earners:

• April 2026: MTD ITSA becomes mandatory for self-employed individuals and landlords with total business or property income over £50,000 per year.
• April 2027: The threshold drops to include those earning over £30,000 per year.
• Date TBC: HMRC has not yet confirmed when MTD ITSA will apply to taxpayers earning below £30,000 or to partnerships. Further guidance is expected in due course.

It’s worth noting that income from all sole trader and rental activities is considered together when determining whether you meet the £30,000 or £50,000 thresholds.

What Will You Need to Do?

If you’re affected by MTD ITSA, you’ll need to change how you keep records and report to HMRC. The key requirements are:

• Keep digital records of your income and expenses (spreadsheets are allowed, but they must link to MTD-compatible software).
• Use MTD-compatible software to manage and submit your records (e.g. QuickBooks, Xero, FreeAgent).
• Submit quarterly updates to HMRC, detailing your income and expenses for each period.
• Submit a final declaration known as the End of Period Statement (EOPS) at the end of the tax year to confirm your figures.

This replaces the traditional once-a-year Self Assessment return with five submissions per year: four quarterly updates, and one annual statement.

How Will This Affect You?

The most immediate impact of MTD ITSA is the increased frequency of reporting. Instead of gathering receipts and figures once a year, you’ll need to:

• Maintain accurate records throughout the year
• Submit data every three months
• Possibly pay more in accountancy or software costs

It also means more day-to-day financial awareness. While this might sound daunting, it can actually lead to better decision-making, easier cash flow planning, and fewer year-end surprises.

However, for some sole traders, this added complexity and cost may prompt a fundamental rethink about how their business is structured.

Should Sole Traders Consider Going Limited?

At Reed & Co Accountants, we expect a growing number of sole traders to explore incorporating as a limited company in light of MTD ITSA.

Here’s why:

1. Quarterly Compliance Costs

Staying compliant with MTD means more administrative work, whether that involves managing your own software or hiring an accountant for assistance. The result? Higher running costs for sole traders.

2. Limited Companies Aren’t Yet Affected

MTD for corporation tax has not yet been implemented, meaning limited companies currently avoid quarterly updates. While that may change in the future, for now, it’s a distinct advantage.

3. Similar Costs = Greater Control

When you factor in the cost of software, quarterly filings, and accountant fees, the cost of running a limited company is often comparable to MTD compliance as a sole trader. But being limited comes with extra tax planning tools.

4. More Tax Efficiency

Limited companies can be more tax-efficient, especially in the £30,000–£60,000 profit range. As a director, you can combine salary and dividends, make pension contributions, and benefit from limited liability protection.

Thinking about making the switch? We can help you compare both scenarios and choose the most tax-efficient path for your business.

Background: The Evolution of Making Tax Digital

MTD isn’t a brand-new idea. The government first proposed it in 2015, aiming to simplify, improve accuracy, and increase digitalisation of taxes.

Here’s a quick timeline of how we got here:

• 2015: Making Tax Digital announced as part of the government’s digital strategy.
• 2019: MTD for VAT launched for VAT-registered businesses over the £85,000 threshold.
• 2022: MTD for VAT extended to all VAT-registered businesses, regardless of turnover.
• 2026: MTD for Income Tax (MTD ITSA) to launch for self-employed and landlords earning £50,000+.

The ultimate vision is to eliminate annual tax returns entirely and replace them with a real-time, digital-first system that better reflects a modern business environment.

Preparing for MTD ITSA: How We Can Help

At Reed & Co Accountants, we’re already helping clients prepare for MTD ITSA, and we can make the process smooth, stress-free, and tailored to your needs.

Here’s how we can support you:

Choosing MTD-Compatible Software

We’ll help you choose and set up the right software, such as Xero, QuickBooks, FreeAgent, or others. If you’re already using spreadsheets, we can integrate bridging software to ensure compliance.

Setting Up Quarterly Reporting

We’ll help you establish a straightforward workflow for submitting quarterly updates and the End of Period Statement, so you never miss a deadline.

Switching to a Limited Company

We’ll explain the pros and cons of incorporating your business, handle the registration process, and ensure your new company is fully tax-compliant from day one.

Ongoing Support

Need help interpreting your figures? Planning your taxes? Avoiding penalties? We’re here to help with year-round guidance, not just during tax season.

Whether you’re just starting out or you’ve been self-employed for years, our MTD support is simple, affordable and designed to work around your business.

Got Questions About MTD ITSA? Let’s Talk

The shift to Making Tax Digital for Income Tax is one of the most significant changes to the UK tax system in decades, and while it might feel overwhelming at first, it doesn’t have to be.

At Reed & Co Accountants, we specialise in helping sole traders, landlords, and small businesses make the transition with confidence. From choosing software to deciding if incorporation is right for you, we’re here to provide honest advice and practical solutions.

Want to find out how MTD ITSA affects you, or whether going limited could save you money?

We’d love to talk.

Call us today or contact us online to arrange a free consultation. Let’s make your move to digital tax stress-free, smart, and more profitable.