Sole traders and landlords earning more than £50,000 have until Friday to submit their first quarterly report under HMRC's new Making Tax Digital regime. The major tax overhaul changes how hundreds of thousands of self-employed people across His Majesty's Revenue and Customs report their earnings and expenses.
HMRC estimates that 864,000 sole traders and landlords fall into the first wave of Making Tax Digital for Income Tax. However, official figures show that only 387,000 customers had signed up to the new format as of one month ago.
An HMRC spokesman said: "Thousands of customers are signing up for Making Tax Digital every week, in line with our expectations. We've already written to two million customers and delivered more than 400 events and webinars. We encourage all customers required to join MTD this year to take that first step and sign up now."
First deadline and expanding scope
The first submission deadline on 7 August covers the current tax year and requires taxpayers to record income and expenses between 6 April and 5 July. The rules apply to a broad range of workers, including electricians, plumbers, landlords, personal trainers, photographers, hairdressers, and consultants.
Over the next two years, the income thresholds will drop significantly, bringing almost three million people into the system. In April 2027, another 1,077,000 taxpayers earning between £30,000 and £50,000 will be required to join.
A further expansion in April 2028 will add 975,000 people earning between £20,000.01 and £30,000. Overall, around 2.9 million sole traders and landlords will eventually be required to choose compatible software to upload quarterly financial records.
Elsa Littlewood, a private client services tax partner at BDO, said: "Getting ready for MTD for Income Tax has been a bit of a headache for accounting firms and taxpayers who are unrepresented may also find the process challenging at first." She highlighted that the initial reporting deadline comes at a rather inconvenient time when many people will be trying to enjoy their summer holiday.
Littlewood added: "It will be interesting to see what proportion of the 864,000 taxpayers in scope actually meet the deadline, particularly if no penalties will apply in the first year. This could be key in determining whether HMRC is able to stick to its plan to extend the programme in 2027 and 2028."
Rules and qualifying income thresholds
Under Making Tax Digital for Income Tax, taxpayers must keep digital records and submit quarterly updates using HMRC-approved software. Taxpayers in scope should check that they are signed up, that their software is compatible, and that their summary is submitted on time.
The requirement applies to individuals filing self-assessment tax returns with self-employment or property income. Eligibility depends strictly on gross turnover rather than net profit, meaning taxpayers with modest earnings after expenses may still be included.
The government plans to introduce future legislation to lower the qualifying income threshold further, potentially bringing in all sole traders and landlords regardless of income. HMRC also intends to include business partnerships at a later date, while limited companies remain exempt because they file through Companies House.
Excluded income and calculation periods
The digital record requirement applies exclusively to self-employment and rental property income and expenses. HMRC confirms that income from savings interest, stock dividends, and pensions does not require quarterly digital tracking, though annual tax returns must still include them.
Taxpayers must determine their start date based on qualifying gross income from specific tax years. Earnings over £50,000 in the 2024/25 tax year require starting Making Tax Digital from this April.
Those earning under £50,000 in 2024/25 must assess their 2025/26 income, with earnings above £30,000 triggering entry in April 2027. Individuals earning below £30,000 in 2025/26 must check their 2026/27 return, where income over £20,000 requires entry in April 2028.
Government objectives and reporting schedules
The government introduced the scheme to modernise the tax system and narrow the tax gap, which represents the difference between tax owed and tax collected. HMRC states the shift will improve accuracy, cut errors, save time, and provide taxpayers with a clearer year-round view of their tax position.
Following the 7 August submission for April to July, subsequent quarterly filings fall on 7 November and 7 February. These updates are non-payment financial summaries, and taxpayers will not be required to pay tax every three months.
HMRC advises users to update their records continuously to make quarterly updates as seamless as possible. The compliant software provides estimated tax bill calculations after each update is transmitted.
Penalties and software requirements
HMRC will not issue penalties for late quarterly updates during the first year of the scheme. Starting in the second year, for tax years after 2026 to 2027, a points-based penalty system will take effect.
Taxpayers incur one penalty point for each missed quarterly update or tax return deadline. Accumulating four points triggers a £200 fixed penalty, with an additional £200 penalty for every subsequent late submission. Taxpayers receive only one point per deadline, even if they operate multiple businesses.
Taxpayers or their accountants must use commercial software compatible with HMRC systems to manage and transmit records. HMRC does not provide its own software, but offers an online software finder tool to help users select from available providers.
Software costs vary, with some external providers charging up to £35 per month, while fee-free options are also available. Users can choose full record-keeping software that links to bank accounts and scans receipts, or bridging software that uploads data directly from existing spreadsheets.
Taxpayers may apply for an exemption if they are digitally excluded. Exemptions apply to individuals unable to use digital devices due to age, disability, health conditions, or location, as well as practicing members of religious orders whose beliefs forbid digital communications.
