Making Tax Digital for the Self-Employed: A Complete Guide

The UK tax system is changing. HM Revenue & Customs (HMRC) has been rolling out Making Tax Digital for the Self-Employed (MTD for ITSA) – a programme that’s transforming how taxes are tracked, calculated, and reported. If you’re self-employed or running a small business, these changes are especially important.

This guide explains what MTD is, who it applies to, when it starts, and how you can prepare so that taxes are more manageable, not more confusing.

Key points

• MTD for ITSA primarily affects sole traders and self-employed individuals 📚
  Making Tax Digital targets unincorporated businesses reporting self-employment or property income through Self Assessment.
• Eligibility is based on gross income, not profit 💰
  The thresholds for MTD are determined by total income from self-employment and property before expenses. This means even businesses with modest profits could be required to comply once their gross turnover crosses the relevant limit.
• Digital record-keeping is mandatory 🖥️
  All income, expenses, assets, and other relevant business records must be kept digitally in HMRC-compatible software. This ensures accuracy, reduces errors, and provides real-time visibility of your finances.
• Quarterly updates replace annual-only reporting 📅
  Under MTD, you submit four quarterly updates to HMRC, plus a final declaration at year-end. While this increases reporting frequency, it allows you to monitor your tax bill throughout the year and prevents surprises at the Self Assessment deadline.

What is Making Tax Digital for Income Tax Self Assessment?

Making Tax Digital is HMRC’s long-term programme that aims to modernise the UK tax system. Its main goal is to reduce errors, improve accuracy, and make tax administration more efficient through digital record-keeping and digital submissions.

MTD has already been introduced for VAT-registered businesses. The next major phase is Making Tax Digital for Income Tax Self Assessment (MTD for ITSA), which applies to self-employed individuals and landlords.

Under MTD for Income Tax, instead of submitting one annual Self Assessment tax return, you will:

• Keep digital records of income and expenses
• Submit quarterly updates to HMRC using approved software
• File a final declaration at the end of the tax year

Don’t worry, this doesn’t mean you’ll have to pay tax four times per year – it only means you’ll report income and expenses more frequently.

Who does MTD for ITSA apply to?

MTD for ITSA targets unincorporated businesses, starting with sole traders (where business and owner aren’t legally separate, with profits taxed via Self Assessment) from April 2026 for those over £50,000 in qualifying self-employment/property income.

If your business income is reported on the self-employment pages of your personal Self Assessment tax return, rather than through a company’s Corporation Tax return, you are within the ‘self-employed’ category that MTD for ITSA is designed for.

If you operate through a limited company, you aren’t within the scope of MTD for ITSA – at least not for that company’s income. Limited companies fall under the Corporation Tax rules instead. However, if you have additional self-employment income outside your company, that income could be subject to MTD rules.

What are the thresholds for Making Tax Digital for the self-employed?

Eligibility for MTD for ITSA is based on gross income, not profit. What does this mean?

Let’s break it down:

Qualifying income

Making Tax Digital for Income Tax is being introduced in stages. Whether and when you must comply depends on your qualifying income – that is, your total gross income from self-employment and property before expenses.

The rollout timetable is as follows:

• From 6 April 2026: Sole traders and landlords with qualifying income over £50,000 must comply.
• From 6 April 2027: The threshold reduces to £30,000.
• From April 2028: The threshold is expected to fall further to £20,000.

HMRC will determine whether you need to join MTD by looking at the most recent Self Assessment tax return filed before your mandated start date. It’s not based on projected income or estimates for the current year, but on the gross income figures already reported to HMRC.

For example:

• If your 2024–25 Self Assessment return shows gross self-employment and/or property income of £52,000, you’ll be required to comply with MTD from 6 April 2026
• If your reported qualifying income is £34,000, you’ll be brought into MTD from 6 April 2027
• If your income is £22,000, you’re likely to fall within scope once the threshold reduces to £20,000, currently planned for April 2028

Over time, MTD will apply to a growing proportion of self-employed people. Even relatively small businesses will eventually be included once the threshold is reduced.

How MTD for ITSA works

There are three core components: digital record-keeping, quarterly updates, and a final declaration.

1. Keep digital records from the start of the tax year

Under MTD, you must keep and maintain digital records of your business transactions using compatible software. This requirement applies from the beginning of your accounting period.

For most self-employed individuals, the accounting period aligns with the tax year (6 April to 5 April).

You are required to maintain digital records of:

• All business income (sales, fees, commissions, or other receipts)
• The date and amount of each transaction
• The category of income
• Business expenses, separated into appropriate categories
• Any assets purchased for business use
• Disallowable expenses (costs that can’t be deducted for tax)
• Mileage or vehicle use records, if claiming simplified vehicle expenses
• Property income and expenses, if applicable

The records must be kept in a digital format that preserves a digital link between entries and submissions. This means you can’t manually copy and paste figures into HMRC’s system.

Why digital record-keeping matters

The purpose of digital record-keeping is to:

• Reduce manual errors
• Improve accuracy
• Encourage regular bookkeeping
• Provide real-time visibility of your business finances

For self-employed individuals who previously updated accounts once a year, this represents a shift toward continuous record maintenance.

2. Submit quarterly updates to HMRC

The second major change under MTD is the introduction of quarterly reporting.

Instead of filing a single Self Assessment return at the end of the tax year, you’ll submit four quarterly updates summarising your income and expenses.

Each quarterly update provides HMRC with:

• Total income for the period
• Total expenses for the period
• A summary of business activity to date

These updates are cumulative summaries, not full tax calculations. They don’t require adjustments for allowances, reliefs, or final tax positions at this stage.

Standard quarterly periods

Although HMRC allows some flexibility, the standard quarters follow the tax year:

Each update must be submitted within one month of the end of the quarter.

Keep in mind that quarterly updates are for reporting purposes only. They don’t change the current tax payment deadlines, which are:

• 31 January (balancing payment and first payment on account)
• 31 July (second payment on account)

3. Submit a final declaration

After the end of the tax year (5 April), you must complete a final declaration by 31 January. This replaces the traditional Self Assessment tax return.

The final declaration:

• Confirms the accuracy of your quarterly submissions
• Includes any adjustments not made during the quarterly updates
• Accounts for additional income sources (such as employment income, dividends, or savings interest)
• Allows you to claim reliefs and allowances
• Calculates your final tax liability for the year

In other words, the quarterly updates provide HMRC with regular summaries, and the final declaration summarises your annual tax position.

MTD software: What you need and why it matters

To comply with Making Tax Digital for Income Tax, you must use HMRC-recognised, MTD-compatible software. You can’t submit quarterly updates manually via the HMRC online portal.

Your software must:

• Maintain digital records of income and expenses
• Preserve digital links between records and submissions (no manual copying and pasting)
• Submit quarterly updates and final declarations directly to HMRC through approved systems

In short, your bookkeeping system must be fully digital and capable of communicating directly with HMRC.

The main types of MTD software available

There are three main categories of software available to self-employed individuals:

1. Self-employed-focused financial apps

A growing number of tools are designed specifically for freelancers and self-employed people rather than accountants.

These platforms focus on:

• Simplicity
• Automation
• Real-time visibility
• Reduced admin

They aim to combine cash management, bookkeeping, and tax preparation in one place, removing the need for multiple systems. One platform that stands out in this category is ANNA.

ANNA is designed specifically for the UK self-employed, freelancers, and small business owners who want tax and admin to feel simpler.

Rather than being accounting software adapted for compliance, ANNA is built around how self-employed people actually operate.

With ANNA, you can:

• Automatically import and categorise transactions
• Separate business and personal spending clearly
• Track income and expenses in real time
• Generate profit summaries instantly
• See tax estimates throughout the year
• Submit MTD-compliant updates directly to HMRC
• Manage invoicing, payroll, and bookkeeping in one place

Because ANNA combines a business account and bookkeeping, it reduces the need for manual reconciliation. Your transactions flow directly into your records, helping maintain accurate digital records without constant data entry and the feeling that you need to triple-check everything.

2. Full cloud accounting platforms

Platforms such as Xero, QuickBooks, and FreeAgent are designed as complete accounting systems.

They typically offer:

• Automatic bank feeds
• Invoice creation and tracking
• Expense categorisation
• Financial reporting
• VAT functionality (if registered)
• Direct submission to HMRC

They are powerful tools, often suited to businesses with more complex accounting needs, higher transaction volumes, and inventory requirements.

However, for many self-employed people, they can feel too technical, as many of them are built primarily with accountants in mind.

3. Spreadsheets with bridging software

Some self-employed individuals may prefer to continue using spreadsheets. This is allowed under MTD rules as long as the spreadsheet can connect to approved bridging software that submits data to HMRC digitally.

This approach can work for very small businesses with simple income and expense structures.

However, it comes with limitations:

• It requires technical setup.
• It doesn’t automate data entry.
• It increases the risk of manual errors.
• It provides limited real-time insight.
• It still requires a separate submission tool.

In general, this approach meets minimum compliance standards but doesn’t improve financial management.

What good MTD software should do for you

Regardless of provider, MTD-compatible software should:

• Automatically import bank transactions
• Categorise income and expenses clearly
• Maintain digital audit trails
• Provide up-to-date profit information
• Estimate tax liabilities during the year
• Submit quarterly updates and final declarations securely
• Store records safely for HMRC compliance

But compliance alone is often not enough.

The best software should also:

• Save you time
• Reduce mental load
• Minimise errors
• Help you understand your finances
• Make tax less intimidating

ANNA is built around this principle. Instead of asking users to become accountants, it automates routine tasks and presents information in plain English.

What are the challenges of MTD for ITSA?

While Making Tax Digital promises more streamlined and accurate tax reporting, it isn’t without challenges. Understanding these obstacles in advance can help you prepare effectively and avoid stress or penalties:

• Increased administrative frequency: Under MTD, you’ll need to submit four quarterly updates throughout the year, in addition to a final annual declaration. Even with the most intuitive software, this represents a significant change from the traditional process, and those who are used to annual bookkeeping may find the increased frequency challenging at first.
• Software costs: MTD-compliant software generally comes with a subscription fee, which adds to business costs. While this is an investment, the benefits tend to outweigh the expense. Good software reduces manual work, prevents errors, saves time, and provides visibility over your business finances, making it a tool for both compliance and business management.
• Learning curve: Not every self-employed person is familiar with accounting software. Transitioning from spreadsheets or paper records to an MTD-compliant system may require time to learn the platform, understand digital reporting, and ensure transactions are categorised correctly.
• Penalties for non-compliance: MTD introduces a points-based penalty system – missing a quarterly update or submitting inaccurate information results in points being assigned, and accumulating a certain number of points triggers financial penalties. For instance, reaching 5 points within a 12-month period may result in a £100 fine, with additional points potentially increasing the penalty amount.

How to prepare for MTD ITSA: Final tips

Even if MTD doesn’t yet apply to you, early preparation reduces stress and ensures a smooth transition when your business crosses the qualifying income threshold.

Here are the steps you can take now:

• Go digital: If you are still relying on paper receipts or unlinked spreadsheets, start transitioning to digital records. Early adoption helps you identify gaps, establish routines, and test software before you are required to submit quarterly updates.
• Separate your finances: A dedicated business account makes record-keeping simpler and more accurate.
• Choose scalable software: Select an MTD-compliant solution that can grow with your business. Platforms like ANNA are designed specifically for self-employed individuals, combining cash management, bookkeeping, and MTD compliance.
• Build a quarterly routine: Start reviewing your income, expenses, and profit summaries at least quarterly.
• Seek professional support if needed: An accountant or bookkeeper can help set up your system, ensure your records are compliant, and identify opportunities for tax efficiency. Even a short consultation can save time, prevent mistakes, and reduce the stress of adopting MTD.

Ready to take on MTD for ITSA? ANNA can help – for FREE

Making Tax Digital introduces new responsibilities, and the right tools can make all the difference.

ANNA combines a business account, bookkeeping, and MTD compliance in one platform, automatically categorising transactions, tracking income and expenses, and preparing your records for HMRC submissions.

If you open an ANNA account, ANNA will prepare and submit your 2025/26 Self Assessment for free. And if you’ve already filed your 2025/26 return using another platform, ANNA will refund what you paid when you open an account. This way, you can start the new tax year with a little extra cash back in your pocket.

By signing up for ANNA today, you can stay compliant with MTD, save time, reduce errors, and gain complete visibility over your business finances – all in one place.

And if you have any questions, we’re in the app to help you 24/7.