What Making Tax Digital means for self-employed professionals and sole traders

From April 2026, as part of the government's plans to modernise the tax system, self-employed business owners with a qualifying income exceeding £50,000 will transition from submitting an annual tax return to providing quarterly updates. The aim of the move to an online tax system is to help reduce errors, improve record-keeping and help businesses stay compliant.

Rob Rees, Divisional Director at Markel Direct, breaks down what HMRC’s Making Tax Digital for Income Tax Self-Assessment is, and provides guidance on who will be impacted by the switch and how to best prepare.

What is Making Tax Digital for Income Tax Self-Assessment, and who does it affect?

HMRC is moving towards quarterly tax reporting to improve the accuracy and efficiency of tax for income tax self-assessments. The initiative is currently mandatory for all VAT-registered businesses, however, the proposed changes will see the initiative expand to income tax for self-employed individuals and landlords with qualifying incomes over £50,000 from April 2026, and over £30,000 from April 2027. 

Making Tax Digital for Income Tax Self-Assessment will require freelancers, sole traders and landlords to:

• Keep digital records of income and expenses.
• Use HMRC-compatible software for submissions, as spreadsheets and manual uploads will no longer be acceptable.

According to the government's projections, about 780,000 people will be affected by this threshold based on their income reported in the 2024/25 tax return. The rules for those earning under £30,000 are still being reviewed, but they can choose to sign up voluntarily.

What does this change mean for small businesses?

In addition to moving from one tax return per year to one every quarter, which is followed by a final end of year declaration, the initiative will also impact how freelancers, sole traders and landlords manage risk.

Common issues with tax returns currently include poor record keeping, late submissions and inaccurate figures, and if systems under MTD for ITSA are not set up correctly, these issues could continue.

Simple things, such as a missed update, broken software link or incomplete data feed could create problems that snowball over time if not addressed. For small businesses where owners often handle finances themselves, this can increase exposure to:

• Late filing penalties
• Incorrect tax payments
• Cash-flow surprises caused by inaccurate reporting
• Admin stress during audits or HMRC checks

Making Tax Digital risk considerations for small businesses

As the move to Making Tax Digital for Income Tax Self-Assessment requires more dependency on technology, data and ongoing processes, rather than annual paperwork and receipts, the type of risks that small businesses encounter will also change.

Greater reliance on software and data

Digital processes are replacing paper records and manual submissions, with small businesses expected to use MTD-compatible software to report their figures. However, if systems fail, links break between platforms, or data is corrupted, businesses may struggle to submit accurate information on time.  

These potential issues highlight the importance of making regular back-ups and taking the time to understand both the accounting software and reporting requirements, reducing the likelihood of issues being caused by human error.

Cyber and data security exposure

Tax return records contain sensitive financial and personal information, and with the shift to a digital landscape where data will now be transferred between systems, the risk of cyber incidents, accidental data loss or ransomware may increase.

Due to the tax submissions changing to quarterly (from the current once a year), there is potential for disruptions to have a greater impact. For example, if tax return self-assessment submissions were delayed due to a cyber incident, system outage or lost records, businesses could potentially face penalties or unexpected tax adjustments. If you are a small business owner, this could substantially impact your cash flow and day-to-day operations.

Lack of preparation for the change

The most immediate risk to small businesses is not being prepared for the change to Making Tax Digital for Income Tax Self-Assessment, as late submissions will ultimately lead to financial penalties.

HMRC is applying a points-based approach to penalties; each missed quarterly update will result in 1 penalty point, with 4 points triggering a £200 fine. After this threshold, each missed update will result in another £200 fine.

As there will be five submissions in total per year (quarterly, plus one annual declaration), and points only reset after 24 months of compliance, the cost of missing submissions could result in costly fines for small business owners.

How to prepare for the switch to Making Tax Digital

Tax returns can be daunting for any business, especially for sole traders, freelancers and landlords who might manage their tax own taxes without the help of an accountant. Below are five key takeaways to consider ahead of the transition:

1. Check software compatibility

Freelancers and sole traders should ensure that their bookkeeping or accounting software is HMRC-compatible and capable of submitting data directly – if it is not, it should be changed promptly. Small business owners who manage their own taxes should also ensure they are familiar with the software and the reporting requirements.

2. Build tax into routine operations

Due to the quarterly submissions, it is recommended that businesses view the tax process as ongoing. Undertaking monthly reviews of your business figures can help to reduce errors, improve visibility and support better cash-flow forecasting.

3. Review how records are kept

If your income and expenses are currently tracked manually, these should be moved into a digital system to help streamline submissions as HMRC requires records to be kept digitally and transferred via ‘digital links’, rather than copied and pasted between systems.

4. Assign responsibility

Whether it is the business owner, or an external accountant, someone must own responsibility for submissions and software maintenance, as this can help to reduce the likelihood of errors caused by confusion or duplication.

5. Upgrade cyber defences

As tax reporting becomes digital, the vulnerability of experiencing a cyber incident also increases. Small businesses should review whether basic cyber security protections and procedures are in place, such as anti-virus software, strong passwords, regular software updates and secure backups, to reduce the risk of disruption, data loss and delayed submissions.

As the transition to Making Tax Digital is fast approaching, it is essential for freelancers, sole traders, and landlords to prepare accordingly. Becoming proficient with accounting software compatible with Making Tax Digital, ensuring thorough expense documentation, and clearly understanding reporting requirements are all critical measures you should consider to prevent unforeseen penalties.

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The information contained within the article is accurate as of the date of publication. Due to the evolving nature of the subject matter, subsequent updates and changes may occur. Readers are advised to verify the current status and accuracy of the information before making any decisions based on it.