MTD ITSA: What Sole Traders Need to Know for 2026
If you’re a sole trader, now is the time to start thinking about how Making Tax Digital for Income Tax Self-Assessment (MTD ITSA) will affect your business. Starting in April 2026, the biggest change to income tax reporting in decades will begin rolling out—and for many business owners, it will require new software, new systems, and new habits.
At Merranti Accounting, we’re already helping our clients get ready, and this guide explains what you need to know and do.
Who Will Be Affected?
MTD ITSA will be mandatory for sole traders and landlords with gross income (not profit) above:
- £50,000 from April 2026
- £30,000 from April 2027
- £20,000 from April 2028
Important: If you run multiple businesses (e.g., self-employment + property letting), the combined turnover is used to assess whether you’re mandated in.
New Filing Requirements
Under the current Self-Assessment system, you file one tax return per year. Under MTD ITSA, this will change:
You must file:
- Quarterly updates (every three months)
- One final declaration after the tax year ends (like an annual tax return)
Each quarterly update is a summary of income and expenses, and doesn’t require full tax adjustments until the final declaration.
Quarterly periods (you choose either):
- Tax-year basis: 6 April–5 July, etc.
- Calendar basis: 1 April–30 June, etc.
⏱️ Submission deadline: 7th day after quarter-end. For example, the first update covering April–June 2026 would be due by 7 August 2026.
Software & Spreadsheets
You’ll need to keep digital accounting records using either:
-
MTD-compliant accounting software (like Xero, QuickBooks, Sage)
-
Spreadsheets, but only when paired with HMRC-approved bridging software
HMRC has announced plans to offer free MTD-compatible software in partnership with a commercial provider—details are expected later in 2025. This may suit smaller businesses using cash basis accounting.
You cannot use copy-and-paste to transfer figures from one system to another. Data must flow digitally end to end.
What Must Be Recorded?
You must keep digital records of:
- The date of the transaction
- The amount paid or received
- The category (e.g. sales, materials, travel)
- Whether it relates to a self-employment or property business
Retailers: Can record daily takings as one entry (requires an election in software).
What About the Final Declaration?
By 31 January after the tax year ends, you must submit a final declaration—this replaces the traditional tax return. This is where:
- Tax adjustments are made (e.g. for disallowable expenses)
- Other income (like dividends or savings) is reported
- Tax reliefs and claims are submitted
Important: Tax is still due by 31 January as before—this does not change under MTD ITSA.
Example: Am I In or Out?
Sarah is a self-employed designer with £36,000 turnover. She also lets out a flat, earning £16,000 in rental income. Her total gross income is £52,000, so she is in scope from April 2026, even though neither business alone crosses the threshold.
Can I Opt Out?
Only in very limited circumstances:
- Age, disability, or remoteness prevents digital use
- Religious objections to technology
- It is otherwise not practical or reasonable
Once you’re in MTD, you’ll stay in unless your turnover stays below the threshold for three consecutive tax years.
Penalties for Non-Compliance
MTD ITSA will use a points-based penalty system like MTD for VAT. You’ll be penalised if you:
- Miss a quarterly filing deadline
- Fail to keep accurate digital records
- Don’t submit the final declaration on time
The good news: errors on quarterly updates won’t incur penalties, as long as they are corrected by the final declaration.
Merranti’s Advice: Get Ready Now
Here’s how we’re helping clients prepare:
Review your turnover now—will you hit £50k this year?
Make sure you’re using digital bookkeeping already
Talk to us about which software is best for your business
Set up your records to align with quarterly submissions
Keep each transaction digitally from the start—no paper spreadsheets
Need Help Getting MTD-Ready?
At Merranti Accounting, we’re helping sole traders like you stay compliant while making the most of their tax position. If you’re unsure whether you need to join MTD ITSA—or want to start preparing now—speak with our team today.
