SLeo Tolstoy wrote in Anna Karenina that spring is “a time of plans and projects”. For hundreds of thousands of self-employed people and property owners, these words are ringing true – and have never seemed more difficult.
This spring, HM Revenue and Customs is introducing the biggest change to the self-assessment tax system in decades.
known as making Tax Digital, it will change the way tax returns are submitted, adding a new “quarterly update” requirement.
HMRC recently issued an “act now” warning, stating that more than 860,000 sole traders and landlords need to start preparing for the change if they have not already done so.
But they are just the first wave of people affected – that number is likely to grow to about 3 million by the spring of 2028 as lower-income individuals are brought into the system.
What is making tax digital?
This is a new system of recording and reporting your tax information to HMRC. This affects self-employed people and those whose property income is above HMRC's income limits,” says Claire Thackaberry, a technical officer at the Low Income Tax Reform Group.
From this April, the starting limit is £50,000. On 6 April 2027, the MTD limit will drop to £30,000. This figure is for self-employment and property income earned in the 2025-26 tax year (which we are in now).
And from 6 April 2028, the limit will fall further: to £20,000 for property and self-employment income earned in the 2026-27 tax year.
People earning more than those limits must use commercial software to send HMRC annual tax returns, as well as quarterly digital records showing their income and expenses from property and self-employment.
The digital record must reflect the value and date of each transaction and, where appropriate, its details HMRC category “Allowable Expenses”.“Every expense is covered,” Thackeray says.
How do I know if I am affected?
Check your 2024-25 tax return. If you were registered for self-assessment and your combined turnover from property and self-employment is over £50,000, you are legally required to move to the new system, unless you qualify for an exemption. If your combined turnover from self-employment and property exceeds the relevant limit, you will need to move to the new system unless you qualify for exemption this year.
The £50,000 limit applies to turnover (ie your gross income, before taking into account your tax and expenses), not profits.
To assess whether you exceed the limit, you need to add up your turnover from property and self-employment. If you started your business in the middle of the year, expect your turnover to be 'annualised' – pro-rata adjusted – by HMRC.
Other sources of income, including employment or PAYE income, are not counted.
Even if they are self-employed, foster carers, kinship carers and shared living carers who receive “qualified care relief” on income from their caring activities will find that this income is exempt from the MTD and does not count towards the limit.
Keep in mind you can earn up to £1,000 with this renting out or trading property each year, or up to £7,500 per year under plan to rent a roomWithout the need to report it on your tax return – meaning HMRC will not take this income into account.
HMRC will be writing to affected taxpayers in February and March, but even if you don't receive a letter, you still have a legal responsibility to comply with the MTD.
“If your letter gets lost in the post, you'll still need to sign up, unless you're exempt,” says Thackaberry.
you can use HMRC's step-by-step online guide to sign up.
Who automatically gets the exemption?
There are some groups of people who do not need to use this system, no matter how much they earn. they include:
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People who do not have a National Insurance number.
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Until at least April 2029: Disabled people who receive Blind Person's Allowance.
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Until at least April 2027: Recipients of qualified care relief who also earn income from property or self-employment.
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Limited companies. MTD applies only to individuals. If you are a director of a company whose only income is your salary and dividends, even if you consider yourself self-employed, your income does not qualify.
A full list of people who qualify for the exemption can be found here MTD guidance on Gov.uk.
Can I get a discount?
If it is not reasonably practical for you to use digital software (for example because of your age, disability, or the remoteness of your location means you cannot access the Internet in your home or business) you can apply to HMRC for an exemption or if you are a member of a religious order “which forbids you from using computers”, says Andy Levett of accountancy firm HW Fisher.
Applications are evaluated on a case-by-case basis. You should continue preparing for MTD while waiting for the decision.
It's not enough to simply say you need an exemption because of your age, warns Thackaberry. “You need to explain how your age affects your ability to comply,” she says.
How do I comply with this?
You (or your accountant or bookkeeper) need to use MTD-compliant software to send you quarterly digital updates, which are due exactly one month after the quarter ends.
For example, records for the first quarter, April 6, 2026, through July 5, 2026, must be submitted by August 7, 2026. Records for the second quarter must be submitted by November 7, 2026. There will be penalty for late submission.
You can pay for the software or use the free version. HMRC has created a online quiz To help you assess what is best for you.
Expect to pay around £5 to £8 per month for all-singing, all-dancing access to premium software like Xero, Sage, QuickBooks, Clear Books or FreeAgent. This cost can be included in your quarterly updates and offset against your income as a business expense.
Which software should I use?
There are two main types:
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Bridging Software. You can connect it to a simple spreadsheet that details all your transactions. You or your agent can manually fill out this spreadsheet once a quarter.
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Software that allows you to create a digital record of your transactions as they occur. You can link this software to your current account and import your transactions automatically. If you are filing the return yourself this is likely to be the least time-consuming option.
If you opt for software linked to your current account, you'll need to use it to classify all transactions on that account as “sales” (income from property or self-employment), “expenses” (costs incurred for business purposes) or “drawings” (personal spending, such as on a friend's birthday card). Any transactions you classify as “drawing” will be excluded from the digital updates sent to HMRC. Any transaction that you classify as an “expense” must be allowable expenses Under HMRC rules.
Even though the software is only tracking transactions in your linked account, you should be able to manually create a digital record for any transactions that accidentally occurred from another, unlinked account or were made using old-fashioned cash.
This means, for example, if you work from home and pay your rent or utility bills from an unlinked joint account to which you contribute, the software will allow you to manually create digital records of these transactions, and show that a relevant proportion of these costs were actually business expenses.
It should also allow you to make manual adjustments to your records so that you can allocate the correct portion of some mixed-use transactions (such as your mobile phone bill or petrol costs) to personal use.
Do my updates have to be accurate?
Although you must send HMRC quarterly updates, the information entered in them does not need to be 100% accurate and may be corrected later.
You can make manual additions and adjustments to the recorded data before sending your final return to HMRC at the end of the year.
Your year-end tax return may also show additional transactions that were not included in the quarterly updates (for whatever reason, including that you forgot about them).
What is the biggest challenge?
“It's going to be a shock to the system,” says Levett.
However, he believes that eventually people will begin to view MTD in a positive light. “This will mean you won’t need to keep paper receipts and deposit them, as the digital system can read your bank account.”
This will reduce the amount of work you have to do, he says, especially at the end of the tax year. “Eventually you can get into a situation where you're sitting on the train or having a coffee doing a quick review of your account, checking your transactions and saying 'that was a business expense for some books I bought,' and 'that was my income,' and then pressing a button.”
But, he admits, not everyone will enjoy categorizing all their transactions all the time. “There are a lot of people who would absolutely hate this idea.”
How can I prepare?
Using a separate account for your business related income and expenses will significantly reduce the number of transactions you need to classify for HMRC. Levett says one of the best ways to prepare for MTD is to open a current account that you use solely for your business.
It is not necessary to have a paid business bank account. This could be a free personal current account with your existing bank.
Metal, a digital banking brand owned by NatWest, offers a free business account for sole traders and landlords. It comes with a complimentary premium version of FreeAgent accounting software, which is MTD-compliant and allows you to create and track invoices.
When Guardian Money tested opening a Metal account late last year, it took 11 days – longer than expected, apparently due to the “high number of account applications”. Otherwise, it was seamless.
The customer service provided by FreeAgent was excellent: an expert spent about 90 minutes on the phone, walking through, step by step, how to use the software to classify digital transactions, how to create manual digital records for cash transactions, create invoices and send digital updates to HMRC. There is also a free webinar you can attend.
What happens if I don't do this?
Each late submission incurs one penalty point. Once you reach four points you'll be fined £200. The points expire after two years if you stay below the four-point threshold during that period.
The good news is that for the first year of MTD, HMRC is waiving the penalty for late quarterly updates.
As long as your final tax return is correct, there is no penalty for filing an incorrect quarterly update.
Levett believes the first year is going to be a “learning experience” for everyone.
“Even HMRC probably knew this first year was going to be a fest of non-compliance and a learning experience,” he says. “So people should not panic.”