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Making Tax Digital for sole traders

If you are a sole trader with qualifying income over the threshold, you keep digital records of your income and expenses and send HMRC a cumulative total every three months.

If you are self-employed and Making Tax Digital for Income Tax applies to you, three things change. You keep your business income and expenses as digital records instead of on paper. You send HMRC a summary of those records four times a year. You finish the year with a final declaration rather than a Self Assessment return.

Nothing changes about which expenses you are allowed to claim, or about when you pay your tax. The rules on what counts as an allowable business cost are the same as they were.

When it applies to you

HMRC works out whether you are in scope from your qualifying income, which for a sole trader means your gross self-employment turnover before expenses, added to any property income.

Your qualifying income was over In this tax year You must use Making Tax Digital from
£50,000 2024 to 2025 6 April 2026
£30,000 2025 to 2026 6 April 2027
£20,000 2026 to 2027 6 April 2028

The first group is already in. If your qualifying income for 2024 to 2025 was over £50,000, you should be keeping digital records now. HMRC checks this against the Self Assessment tax return you submitted for that year.

Read more about what counts as qualifying income and about who has to use Making Tax Digital.

Cash basis is now the default

This is the part people most often get wrong, because it changed recently.

Cash basis means you record income when the money actually reaches you, and expenses when you actually pay them. Traditional accounting, also called the accruals basis, means you record income and expenses by the date you invoiced or were billed, whether or not the money has moved.

From the 2024 to 2025 tax year, cash basis is the default for sole traders and partnerships without corporate partners. You no longer elect into it. If you want traditional accounting instead, you have to elect out.

Two limits that used to apply are gone. There is no longer a turnover ceiling: you used to have to be under £150,000 to enter the cash basis and had to leave it once turnover went over £300,000. Both thresholds were removed. The old £500 annual cap on deducting interest was also removed, so interest is now deductible in full as long as it is incurred wholly and exclusively for the trade.

Some businesses cannot use cash basis at all, including a limited company, a limited liability partnership, a partnership with one or more corporate partners, a Lloyd's underwriter, a farming business with a current herd basis election, a farming or creative business with a fluctuating profit averaging claim, a business that has claimed business premises renovation allowance within the previous 7 years, a business carrying on a mineral extraction trade, and a business that has ever claimed research and development allowance.

Which one should you use

Cash basis suits most small sole traders. You are taxed on money you have actually been paid, so an unpaid invoice does not create a tax bill.

Traditional accounting tends to suit you better if you carry a lot of stock, if you have complex arrangements, or if you need accounts a bank will lend against. If you are not sure, ask an accountant before you choose, because the switch has knock-on effects in the year you make it.

Which expenses you can claim

HMRC groups allowable business expenses as office costs such as stationery and phone bills, travel costs such as fuel, parking and train or bus fares, uniforms and other allowable clothing, staff costs such as salaries and subcontractor fees, stock and raw materials, financial costs such as insurance and bank charges, premises costs such as heating, lighting and business rates, advertising and marketing including website costs, and training courses related to your business.

An expense has to be for the business. If something is used partly privately, only the business share is allowable.

Two things to watch:

  • If you claim the £1,000 trading allowance, you cannot deduct expenses as well. It is one or the other.
  • Under traditional accounting you claim capital allowances on equipment, machinery and business vehicles. Under cash basis you claim capital allowances on a car, but other items you buy and keep for the business are claimed as ordinary allowable expenses.

Some costs, business entertainment being the common one, are normal business spending but are not allowable against tax. Record them, then leave them out of your taxable profit.

Flat rates instead of working costs out

Simplified expenses let you use flat rates for vehicles, working from home, and living on your business premises. You can use them as a sole trader or in a partnership with no company partners.

Mileage:

Vehicle 2026 to 2027 Before 6 April 2026
Cars and goods vehicles, first 10,000 miles 55p a mile 45p a mile
Cars and goods vehicles, over 10,000 miles 25p a mile 25p a mile
Motorcycles 24p a mile 24p a mile

Once you use the flat rate for a particular vehicle you have to keep using it for that vehicle.

Working from home:

Hours of business use a month Flat rate a month
25 to 50 £10
51 to 100 £18
101 or more £26

The consolidated expenses option for smaller businesses

If your annual turnover from self-employment is below the VAT registration threshold, which is £90,000, you can categorise your digital records in less detail. Instead of tagging every transaction to a specific category, you only need to record whether it is income or an expense. Your quarterly update then carries a single total for income and a single total for expenses.

This is sometimes called a three line account. It is optional. If you find the detailed categories useful, keep using them.

What a quarterly update actually contains

Each digital record needs three things: the amount, the date the income was received or the expense was incurred, and the category.

Your software then adds those records up and sends HMRC totals for each category you have used. HMRC does not receive your individual receipts or invoices. For self-employment the categories are turnover and other business income on the income side, and cost of goods, construction payments, wages, travel, rent, repairs, office costs, advertising, entertainment, interest, bank charges, professional fees and other expenses on the expense side.

Each update runs from the start of the tax year to the end of the update period, so it is a running total rather than a snapshot of one quarter. That means a mistake in an early quarter can be corrected in a later one. You still have to send an update even if you had no income and no expenses in the period.

Period covered Deadline
6 April to 5 July 7 August
6 April to 5 October 7 November
6 April to 5 January 7 February
6 April to 5 April 7 May the following tax year

If your accounting period runs from 1 April to 31 March, HMRC suggests you consider calendar update periods instead. You have to select them in your software before you send your first quarterly update for that income source.

There is more detail in quarterly update deadlines and what digital records you need to keep.

A quarterly update is not a tax bill

Quarterly updates report what has happened in your business. After you send one you can get an estimate of your tax bill in your software or in your HMRC online services account, but it is only an estimate. HMRC says it will be less accurate if you have other income you have not reported yet, or if your accounting period does not line up with the tax year.

Your final tax position is settled at the end of the year when you submit your tax return through your software. That step, the final declaration, replaces the need to send a Self Assessment tax return, and the deadline is 31 January following the end of the tax year. Making Tax Digital does not change the way you pay your tax or the dates payments are due. See do I still file a Self Assessment tax return.

MTD Gateway keeps your self-employment records against HMRC's own category set and sends your in-year quarterly updates. It does not handle the final declaration, so you will need other software or HMRC's own service to finalise the year.

Last reviewed 25 July 2026. This is general information about how Making Tax Digital works, not tax advice. We are not accountants. If your situation is complicated, speak to one, or check the guidance on GOV.UK.

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