The New Tax System Coming In 2026 For Sole Traders And Landlords: Making Tax Digital In The UK
- MAZ
- Feb 16
- 14 min read
The New Tax System Coming in 2026 for Sole Traders and Landlords: Making Tax Digital in the UK
Have you ever scrambled in January to pull together all your receipts and invoices from the past year, just to get your Self Assessment tax return done on time? I certainly have, back when I was helping a client who ran a small plumbing business alongside a couple of rental properties. He’d end up with shoeboxes of paperwork, and we’d spend hours sorting it all out. If that sounds familiar, then the changes coming in 2026 might actually feel like a breath of fresh air – once you get past the initial adjustment.
Making Tax Digital (or MTD for short) for Income Tax is HMRC’s way of bringing things into the modern age. From April 2026, many sole traders and landlords will switch from one big annual tax return to keeping digital records and sending shorter updates to HMRC every few months. It’s designed to make tax simpler in the long run, reduce mistakes, and give you a clearer picture of what you owe as the year goes on. I know change can feel daunting, especially with everything else you’re juggling, but I’ve guided plenty of clients through similar shifts, and most end up saying it saves them time.
Let’s break this down step by step so you know exactly what’s ahead, whether it affects you right away, and how to get ready without stress.
Who Needs to Make the Switch in 2026 – And Who Gets More Time?
Not everyone has to jump in straight away. HMRC is rolling this out in phases based on your total gross income from self-employment and property rentals combined. Gross means your turnover or rental income before deducting any expenses.
● If your combined gross income was over £50,000 in the 2024/25 tax year (the one you’re reporting on your return due by 31 January 2026), you’ll need to start using MTD from 6 April 2026.
● For those with gross income over £30,000 (but not exceeding £50,000), it kicks in from April 2027.
● And looking further ahead, the threshold drops to over £20,000 from April 2028.
Important note: This only counts income from your sole trader business and property rentals (UK or overseas). Wages from a job, pensions, dividends, or investment income don’t push you over the threshold.
HMRC will check the figures from your recent tax returns and write to you if you’re in scope. I’ve seen clients get these letters and panic a bit, but it’s just confirmation – not a demand for payment. If your income is close to the line, keep an eye on it, as once you’re in, you generally stay in even if it dips later.
If you’re below these levels for now, you can carry on with the usual annual Self Assessment. You could even volunteer to join early if you want to get ahead – some of my clients have done this and found it helpful for staying organised.
What Will Your Day-to-Day Look Like Under the New System?
The biggest shift is moving from paper records (or chaotic spreadsheets) to proper digital ones. You’ll need to use software that’s approved by HMRC to track your income and expenses as they happen.
Here’s what you’ll actually have to do each year:
● Quarterly updates: Four times a year, send a simple summary of your income and expenses to HMRC. These are due by the 7th of the month after each quarter ends (aligning with VAT deadlines if you’re registered for that).
○ 6 April to 5 July: due 7 August
○ 6 July to 5 October: due 7 November
○ 6 October to 5 January: due 7 February
○ 6 January to 5 April: due 7 May (roughly)
These aren’t payments – just updates. Good software will generate them automatically from your records.
● End-of-year declaration: Instead of the full Self Assessment, you’ll finalise everything with one more submission, usually by 31 January the following year.
You’ll also get a better ongoing view of your tax position, which can help with budgeting for those payments on account.
For the first year (2026/27), HMRC is being lenient: no penalty points for late quarterly updates if you’re mandated to join. But do keep on top of things – payments and the final declaration still have full penalties if late.
Choosing the Right Software – It’s Easier Than You Think
This is the part that worries people most, but there are options to suit every budget and tech comfort level.
Many providers now offer MTD-compatible tools, from full accounting packages like QuickBooks, Xero, or Sage to simpler ones designed just for sole traders and landlords. There are even a few free options for basic needs.
If you’re happy with spreadsheets, you can keep using them but pair with “bridging” software that sends the data to HMRC.
I always advise clients to start testing now. Sign up for a free trial, input some sample transactions, and see how it feels. HMRC has a list of approved software on GOV.UK – search for “Making Tax Digital compatible software” to browse.
For landlords, look for tools that handle things like rent tracking, expenses, and separating personal from business use if needed. Some integrate with bank feeds, so transactions import automatically – a real time-saver.
How This Could Actually Benefit You
I’ll be honest: the transition takes a little effort. But once set up, many of my clients find they spend less time on tax overall.
You’ll catch issues early rather than surprises in January. Quarterly updates mean fewer errors, and digital records make claiming expenses straightforward.
One landlord I work with used to forget deductible costs until the last minute. Now, with everything logged as it happens, he’s claiming more legitimately and paying less tax.
It also gives you a running total of what you might owe, helping plan those January and July payments.
Common Worries and How to Handle Them
What if tech isn’t your strong point? You’re not alone. HMRC offers exemptions for those who genuinely can’t go digital (like some religious communities or if it’s unreasonably difficult). Apply through GOV.UK if needed.
Joint property owners? Income is usually split equally, so check your share.
Multiple businesses or properties? You’ll report them separately in most cases, but software handles that.
Costs? Basic software might be £10–30 a month, but factor in time saved. Some accountants (like me) bundle it into fees.
If you’re already VAT-registered and using MTD for that, you’re ahead – it’s similar but separate.
Getting Ready: A Simple Checklist
Here’s what I recommend to my clients right now:
● Check your 2024/25 gross income figures – add up self-employment turnover and rental income.
● Research software options and try a couple.
● If you’re close to the threshold, consider voluntary sign-up to practise.
● Update your record-keeping habits – start digitising receipts (apps make this easy).
● Join HMRC’s testing programme if eligible – it’s a gentle introduction.
Head to GOV.UK and search “Making Tax Digital for Income Tax” for the official guidance. It’s clear and has tools to check if you’re affected.
Wrapping Up: You’ve Got This
Making Tax Digital might feel like another thing on your plate, but it’s really about making tax less of a burden in the end. I’ve seen clients go from dreading January to feeling in control year-round.
Start small – check your numbers and explore one piece of software this month. If your situation is complicated (multiple properties, overseas income, or you’re just unsure), do reach out to an accountant for personalised help. It’s always better to prepare early than rush later.
You run your business or properties because you’re good at it – let the right tools handle the tax side. Here’s to a smoother 2026 and beyond. If you have questions, drop me a line – I’m always happy to chat through it.
What Changes for Landlords Specifically?
If you’re a landlord reading this, you might be wondering how MTD treats rental income differently from a sole trader business. The good news is that the rules are very similar, but there are a few nuances worth knowing.
For property income, you’ll report your gross rents received and allowable expenses in the same quarterly updates. If you have multiple properties, you can usually bundle them together as one “property business” unless they’re overseas (those are separate).
Jointly owned properties – say, with a spouse or partner – are a common setup. Under MTD, each owner reports their share. To make life easier, HMRC has introduced some flexibility: you won’t always need to split every expense in the quarterly updates if it’s jointly held. You can often report the full amounts and adjust at the end-of-year declaration. It’s designed to avoid double-counting headaches.
Furnished holiday lets used to have special rules, but from April 2025, they’re treated like ordinary rentals for tax purposes anyway, so no big surprises there under MTD.
One thing I’ve noticed with landlord clients: many underestimate how much time they spend chasing tenancy deposits, repairs, or agent fees. Digital software can categorise these automatically – snap a photo of an invoice with your phone, and it’s logged. I had a client with a portfolio of five buy-to-lets who switched early; he reckons it’s cut his admin time in half already.
If you’re claiming things like the property allowance (£1,000 tax-free if your gross rents are low), that stays the same – but once you’re over the MTD thresholds, full digital reporting applies regardless.
Real-Life Examples to Make It Clear
Let me paint a couple of pictures based on clients I’ve worked with (names changed, of course).
Take Sarah, a freelance graphic designer with turnover around £55,000 last year, plus a small rental flat bringing in £12,000 gross. Her combined qualifying income exceeds £50,000, so from April 2026, she’s in. She was dreading it, but we set her up with simple software that pulls in bank transactions. Now, instead of a mad rush in January, she spends maybe 20 minutes a quarter reviewing what the software has drafted. She’s already spotted a few overlooked expenses, like software subscriptions, that are saving her tax.
Then there’s Mike, a landlord with three properties generating £48,000 gross rents and no other self-employment. He’s just under the £50,000 mark for 2024/25, so he gets until at least April 2027 (when the threshold drops to £30,000). But he’s chosen to join voluntarily now because his accountant handles it, and he likes seeing his tax position update in real time – especially useful with rising interest rates affecting his buy-to-let mortgages.
These examples show it’s not one-size-fits-all. Your income mix and how hands-on you want to be will shape the experience.
Penalties, Payments, and What HMRC Expects
HMRC isn’t starting with a heavy hand. For anyone mandated from April 2026, there’s a grace period: no penalty points for late quarterly updates in that first year (2026/27). You’ll still need to submit them to finalise your tax, and payments on account remain due as usual in January and July.
Late payments or the final declaration? Those carry the normal interest and penalties. The aim is to help you bed in without immediate stress.
Digital records must be kept from day one of your MTD start date. That means no more relying solely on paper bank statements or manual lists – everything needs to be in compatible software. But you don’t have to go fully paperless overnight; many tools let you upload scans.
If you make a mistake in a quarterly update, you can usually correct it in the next one without fuss, as they’re cumulative.
Partnerships and More Complex Setups
A quick word if you’re in a partnership: general partnerships (where all partners are individuals) aren’t mandated yet – the date is still to be confirmed, likely later. But if you have a sole trader side hustle alongside rental income, the sole trader part follows the usual thresholds.
For trusts or companies letting property, different rules apply – MTD for Income Tax is really aimed at individuals.
Staying Updated and Where to Find Help
Things do evolve – HMRC has been tweaking details right up to now. The best place for the latest is directly on GOV.UK: search for “Making Tax Digital for Income Tax”. They have a handy online tool to check your exact start date based on your circumstances.
Webinars and videos from HMRC are straightforward and free. Many software providers run demos too.
If you’re feeling overwhelmed, talk to an accountant early. We can review your records, recommend software that fits your setup, and even handle the submissions for you. It’s not about extra cost long-term; good advice often pays for itself in tax savings and peace of mind.
You’re building something with your business or properties – don’t let tax admin hold you back. With a bit of preparation now, April 2026 will feel like a smooth step forward rather than a leap into the unknown. Take it one task at a time: check your 2024/25 figures today, browse a couple of software options tomorrow. You’ll be ahead of the game, and that’s a great place to be.
FAQs
Q1: What happens if a sole trader's qualifying income fluctuates just around the £50,000 threshold from one year to the next?
A1: In my experience advising clients over the years, this is one of those grey areas that causes real headaches. Once you're mandated into Making Tax Digital based on exceeding £50,000 in the relevant look-back year, you generally stay in the system even if your income dips below later on. I've had a plumber in Manchester who crossed £50,000 in 2024/25 due to a big contract, then dropped back to £45,000 the next year – he still had to continue with quarterly updates and digital records. The only way out is if your income stays below the threshold for several years and you meet HMRC's criteria to opt out, but it's not automatic. My advice? Treat it as permanent once you're in, and use the software to your advantage for better cash flow planning.
Q2: How does Making Tax Digital handle overseas rental income for a UK landlord?
A2: Well, it's worth noting that overseas property income does count towards your qualifying threshold if it's reportable on your UK tax return. For a client I worked with who had a holiday let in Spain alongside UK rentals, the gross rents from both pushed him over £50,000, so he joined from April 2026. You'll report foreign rents separately in your software as a distinct property business, which keeps things tidy for things like foreign tax credits. The key pitfall is currency conversion – make sure your software handles it properly using HMRC-approved exchange rates, or you could end up with discrepancies. Start logging those foreign expenses digitally now to avoid a rush.
Q3: Can a landlord with jointly owned properties delay or split their Making Tax Digital obligations?
A3: Joint ownership is common, and I've seen couples in Birmingham navigate this cleverly. Only your share of the gross rental income counts towards the threshold – usually 50/50 unless you've told HMRC otherwise. So if the total rents are £80,000 but your share is £40,000, you're not mandated yet. In quarterly updates, there's flexibility: you can often report the full joint figures and adjust at year-end to avoid double work. One couple I advised set up separate logins in their software for clarity. If one partner's share pushes them over while the other's doesn't, only the higher earner starts in 2026 – but chat to your accountant early to align records.
Q4: What if a sole trader also has significant dividend income – does that affect the threshold?
A4: No, and this trips up a lot of my higher-earning clients who own their own companies. Dividends, pensions, or savings interest don't count as qualifying income – it's strictly gross turnover from self-employment and property rentals. I had a consultant in Leeds with £40,000 sole trader fees plus £30,000 dividends; he stayed below threshold until his fees grew. But remember, once in MTD, you'll still declare dividends in your final declaration through the software. The upside? It forces better separation of income streams, which can highlight tax planning opportunities like salary vs dividends.
Q5: How should a landlord claiming the £1,000 property allowance prepare for digital records?
A5: If your gross rents are low enough for the full property allowance, you might not hit the threshold anyway – but if other income pushes you in, you'll need full digital tracking even for small rentals. A client with two low-yield flats claimed the allowance for years, but when combined with her freelance work it exceeded £50,000, she had to digitise everything retrospectively for the first quarter. My tip: even if you're allowing now, start categorising expenses in simple software – things like agent fees or repairs – so transitioning feels seamless and you might spot more deductions than the flat allowance allows.
Q6: Is there any grace for tech issues or mistakes in the first few quarterly updates?
A6: HMRC is being reasonably understanding for the 2026/27 year – no penalty points for late quarterly submissions if you're mandated from April 2026. I've guided clients through VAT MTD transitions, and similar soft landings helped. But don't rely on it forever; payments and the final declaration still attract full penalties. One trader I know submitted a quarter late due to software glitches – no points accrued that year, but he fixed it quickly. Test your setup thoroughly beforehand, and keep backups – a quick call to HMRC's MTD helpline can resolve most teething problems without drama.
Q7: What options exist for sole traders who prefer spreadsheets over full accounting software?
A8: You're not forced into expensive packages – many of my less tech-savvy clients stick with spreadsheets paired with bridging software that sends data to HMRC. It's cheaper and familiar. A builder in Bristol I advise uses Excel for daily invoicing, then a free or low-cost bridge tool quarterly. Just ensure the bridge is HMRC-approved and handles categorisation properly. The catch? Some adjustments, like capital allowances, might need manual tweaks at year-end. Try a few options now; most have trials, and it often ends up simpler than expected.
Q8: How does Making Tax Digital interact with cash basis accounting for small traders?
A8: If you're eligible and already on cash basis, you can continue – MTD doesn't force accrual accounting. But digital records must still track cash in and out accurately. I had a market trader who loved cash basis for its simplicity; under MTD, his software automated it beautifully, flagging VAT thresholds early. The potential pitfall is mixing methods across quarters – stick consistent. For those near limits, switching to accrual later might make sense for growth, but ease in gently with your current method.
Q9: Can a landlord with furnished holiday lets still use old rules under the new system?
A9: The special tax treatment for furnished holiday lets ended in April 2025, so from 2026 they're just ordinary rentals under MTD anyway. A client with a cottage in the Lake District lost FHL perks but found digital tracking highlighted more allowable expenses like utilities. Report them as standard property business in your software – no separate category needed now. It's a shift, but many end up better off claiming actual costs rather than old reliefs.
Q10: What if a sole trader ceases trading part-way through a tax year after starting MTD?
A10: You can notify HMRC of cessation through your software, and quarterly obligations stop from that point – but finalise any outstanding updates and the end-of-year declaration. I've helped a retailer who closed up shop in September; we submitted partial quarters cumulatively, then a final one. No ongoing requirements after cessation, which is a relief. Just keep records for the usual six years in case of queries – digital makes archiving easy.
About the Author
Maz Zaheer, AFA, MAAT, MBA, is the CEO and Chief Accountant of MTA and Total Tax Accountants, two premier UK tax advisory firms. With over 15 years of expertise in UK taxation, Maz provides authoritative guidance to individuals, SMEs, and corporations on complex tax issues. As a Tax Accountant and an accomplished tax writer, he is renowned for breaking down intricate tax concepts into clear, accessible content. His insights equip UK taxpayers with the knowledge and confidence to manage their financial obligations effectively.
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