Preparing for Making Tax Digital changes

With recent research suggesting that almost half of UK sole traders are unprepared for upcoming changes to the Making Tax Digital (MTD) initiative, individuals are advised to plan in advance in order to ensure they are ready to meet any challenges. In this Hot Topic we consider how individuals can make sure they are ready for the changes to MTD.

Upcoming changes

Making Tax Digital for Income Tax (MTD for IT) is a new way of reporting income and expenses if you're a sole trader or landlord.

Under this new way of reporting, sole traders and landlords will use compatible software that enables them to:

• create and store digital records of their business income and expenses;
• send quarterly updates to HMRC; and
• submit a tax return and pay tax due by 31 January the following year.

Although MTD has been paused for individuals until at least 2026, HMRC has already introduced the Personal Tax Account and Simple Assessment.

The new MTD rules, which mandate digital record-keeping and quarterly income tax updates starting April 2026, can lead to significant penalties.

MTD for IT will require self-employed individuals, landlords and small businesses earning over £50,000 to keep digital financial records and submit quarterly updates using compatible software from April 2026. The threshold drops to £30,000 in 2027 and to £20,000 in 2028.

The changes could place a significant burden on business owners, who will be required to submit updates to HMRC each year.

Challenges for sole traders

A survey of 1,000 sole traders carried out by IRIS Software found that nearly one in three have never heard of MTD, outlining the need for individuals to prepare in order to avoid putting themselves at risk of non-compliance.

76% of sole traders polled said they feel they should be more aware of the changes. IRIS Software found that awareness and preparedness decline with age, as younger generations are more likely to manage their finances via technology.

32% of survey respondents were more optimistic about the MTD changes and stated they would research them in their own time. 7% said they trusted their accountants to advise them at the appropriate time. Just 23% of sole traders feel they are very prepared for the changes to MTD.

Mark Chambers, Managing Director at IRIS Accountancy, said: 'These findings highlight an important moment of opportunity for the UK's sole traders. With MTD just around the corner, there's a real chance for businesses to modernise their financial processes, unlock efficiencies, and gain better visibility of their income and expenses.

'It's encouraging to see that nearly a quarter feel ready to meet the requirements, but that leaves a significant portion not experiencing the benefits of digitalised tax reporting that compliance will bring.'