If you’re a sole trader in the UK, you’ve probably heard of Making Tax Digital (MTD). But what does it really mean for you?
With rules evolving and deadlines approaching, it’s essential to understand how MTD affects your business and what steps you should be taking now to stay compliant and stress-free.
In this article, we’ll break down everything sole traders need to know about MTD in 2025, in plain English.
What Is Making Tax Digital?
Making Tax Digital (MTD) is an initiative by the HMRC to modernise the tax system.
The goal is to make tax administration more effective, efficient, and easier for taxpayers to get right.
Under MTD, businesses must keep digital records and submit their tax returns digitally using compatible software.
What Are the Current Rules for Sole Traders?
At the time of writing this in June 2025, here’s where things stand
MTD for VAT
If you’re a sole trader registered for VAT (i.e. your turnover is above the VAT threshold of £85,000), you must already be using MTD-compatible software to keep records and submit VAT returns.
MTD for Income Tax Self Assessment (MTD for ITSA)
This is the big change on the horizon. It’s due to become mandatory from April 2026 for sole traders and landlords with income over £50,000. Those earning between £30,000 and £50,000 will be brought in from April 2027.
So while you may not need to comply with MTD for ITSA just yet, 2025 is your ideal window to get ready.
Download our free Taxes Made Simple guide which breaks down all you need to know about taxes as a UK business owner, not just VAT.
What Will MTD for ITSA Involve?
Once MTD for ITSA applies to you, you’ll need to:
- Keep digital records of your income and expenses (no more manual logs or paper receipts).
- Use MTD-compatible software to maintain those records.
- Submit quarterly updates to HMRC about your income and expenses.
- File an end-of-period statement and a final declaration annually (instead of one Self Assessment return).
This means more frequent reporting, but it can also help you keep on top of your finances more regularly.
At Legacy Figures Accountancy, we specialise in managing your business finances with you. Want to learn more? Let’s have a chat.
How Can Sole Traders Prepare for MTD in 2025?
Here’s what we recommend sole traders do this year:
1. Check Your Income Level
Work out whether you’re likely to exceed the £50,000 threshold in the next tax year.
If so, MTD for ITSA will apply to you from April 2026.
2. Choose MTD-Compatible Software
Start exploring accounting software that supports MTD for ITSA.
Popular choices include FreeAgent, Xero, QuickBooks, and Sage.
Any one of these will be a good choice.
3. Start Keeping Digital Records Now
Even if it’s not yet mandatory, getting into the habit of digital bookkeeping will make the eventual transition far smoother.
Using accounting software like Xero and Quickbooks will have more benefits for you.
4. Work With a Bookkeeper
A qualified bookkeeper can help you select the right software, set up your digital systems, and ensure you stay compliant without added stress.
They can also help you with identifying ways to reduce your tax bill as a sole trader.
5. Stay Informed
MTD rules continue to evolve.
Make sure you’re on HMRC’s radar and get updates directly, or subscribe to trusted bookkeeping blogs (like ours!) for simplified updates.
What If You’re Under the Threshold?
If your annual income is below £30,000, you won’t be mandated to follow MTD for ITSA just yet.
However, HMRC has plans to include more taxpayers in the future, so getting ready early is still smart.
Also, adopting digital tools now can make your bookkeeping easier and help you feel more in control of your business finances.
Final Thoughts: What’s Best for You and Your Business?
Making Tax Digital may sound daunting, but it doesn’t have to be.
For sole traders, 2025 is the perfect time to get ahead of the curve.
By understanding the rules, choosing the right tools, and getting support if needed, you can avoid last-minute stress and actually benefit from clearer, more consistent financial management.
If you’re unsure where to start or just want someone to walk you through it, we’re here to help.
👉 Get in touch today for a friendly, no-obligation chat.
