What is MTD ITSA and who does it affect?
Making Tax Digital for Income Tax Self Assessment (MTD ITSA) is HMRC's programme to move self assessment onto a fully digital footing. From April 2026, sole traders and landlords with qualifying income over £50,000 must keep digital records and submit quarterly updates to HMRC using compatible software.
The £50,000 threshold applies to your total qualifying income from self-employment and property combined. If you earn £45,000 from your sole trader business and £8,000 from a rental property, you are over the threshold and must comply.
From April 2027, the threshold drops to £30,000. From April 2028, it drops again to £20,000. If you are a sole trader earning £25,000 today, you will be caught by 2027. It is worth preparing now.
As ICAEW qualified accountants, we have been working with clients on MTD for VAT since 2019. The principles for MTD ITSA are similar but the record keeping requirements are broader.
What records must a sole trader keep under MTD ITSA?
HMRC requires you to maintain a digital record of all business income and expenses. This is not optional. You cannot use paper records or spreadsheets alone unless they link to compatible software via bridging software.
The specific records you must keep include:
- Income records: Every sale, invoice raised, payment received, and any other business income. You need the date, amount, and a description of what the income relates to.
- Expense records: Every business cost you incur. Date, amount, description, and the category of expense (e.g. materials, travel, office costs).
- Personal drawings: Money you take from the business for personal use. These are not business expenses but must be recorded separately.
- Capital items: Purchases of equipment, vehicles, or other assets used in the business. These are not day-to-day expenses and need separate tracking.
- VAT records (if registered): If you are VAT registered, your MTD ITSA records must reconcile with your MTD for VAT records. HMRC will cross-check.
You do not need to scan every receipt into the software immediately. But you must record the transaction digitally within a reasonable time. HMRC has not specified a hard deadline for each entry, but the quarterly submission requires complete and accurate data for that period.
What about the "three clear days" rule?
Under MTD ITSA, you must keep your digital records for at least three years after the 31 January following the tax year. For the 2026/27 tax year, that means keeping records until at least 31 January 2031.
This is longer than the standard self assessment record keeping requirement of 22 months after the tax year end. HMRC wants the digital records available for inspection if they open a compliance check.
What software do you need for MTD ITSA record keeping?
You must use HMRC-recognised software that can:
- Capture and store your income and expense records digitally
- Calculate your total income and expenses for each quarterly period
- Submit the quarterly update to HMRC digitally
- Provide an end-of-year finalisation statement
The main options are:
- Xero - widely used by sole traders and small businesses. MTD ITSA compatible.
- QuickBooks - popular with freelancers and contractors. Offers MTD ITSA functionality.
- FreeAgent - designed for freelancers and small Ltds. Works well for sole traders.
- Sage Accounting - a solid choice for tradespeople and service businesses.
- GoSimpleTax - a simpler option if you have straightforward records.
If you prefer spreadsheets, you can use bridging software like Dext or Receipt Bank to connect your spreadsheet data to HMRC. But the records themselves must be digital. A paper ledger with a spreadsheet typed up quarterly will not meet the requirement.
We recommend choosing software now and setting it up properly. The cost is typically £10 to £30 per month depending on the platform. That is a deductible business expense.
How do quarterly updates work under MTD ITSA?
Instead of filing one self assessment return each year, you will submit four quarterly updates plus an end-of-year finalisation statement.
The quarterly periods are:
- Period 1: 6 April to 5 July (submit by 5 August)
- Period 2: 6 July to 5 October (submit by 5 November)
- Period 3: 6 October to 5 January (submit by 5 February)
- Period 4: 6 January to 5 April (submit by 5 May)
Each quarterly update reports your total income and total expenses for that period. You do not need to calculate profit or tax at this stage. HMRC uses the data to build a running total for the year.
The end-of-year finalisation replaces the current self assessment return. You will still need to declare other income (employment, dividends, savings interest) and claim reliefs. This finalisation is due by 31 January after the tax year ends, just like the current deadline.
What happens if you miss a quarterly deadline?
HMRC will issue a late submission penalty. The first late submission incurs a fixed penalty. Subsequent late submissions within the same tax year attract higher penalties. There is no "one free pass" under MTD ITSA.
If your records are incomplete when the deadline arrives, submit what you have. A partial update is better than a missed deadline. You can correct errors in the next quarterly update or the finalisation.
What records do not need to be digital?
Some records can remain outside your digital system:
- Bank statements: You do not need to digitise your bank statements if your software links to your bank feed. But you must reconcile transactions to your digital records.
- Receipts under £5: HMRC does not require you to keep receipts for individual expenses under £5, though you still need to record the transaction in your software.
- Personal records: Your personal bank account records, mortgage statements, and non-business documents are not in scope.
But do not rely on these exceptions. Most sole traders find it easier to digitise everything. A receipt scanning app like Dext or AutoEntry takes seconds per receipt and keeps your records audit-ready.
How does MTD ITSA affect sole traders who are not yet over the threshold?
If your qualifying income is below £50,000, you are not required to comply from April 2026. But the threshold drops to £30,000 in April 2027 and £20,000 in April 2028. If your income is growing, you will cross one of these thresholds.
There is also a voluntary option. You can join MTD ITSA early if you want to. Some sole traders find the quarterly rhythm easier than a once-a-year scramble. The software keeps you organised and reduces the risk of missing deductions.
If you are below £20,000, MTD ITSA will not apply to you in the foreseeable future. HMRC has not announced plans to extend it further down. But the direction of travel is clear: HMRC wants all self-employed people on digital records eventually.
Practical steps to prepare for MTD ITSA record keeping
Here is what we recommend you do now, regardless of your current income level:
- Choose your software. Pick one of the main platforms and set it up. Most offer free trials. Test two or three before committing.
- Link your bank account. Connect your business bank account to the software. This automates transaction import and reconciliation.
- Set up expense categories. Create categories that match HMRC's standard headings: materials, travel, office costs, professional fees, advertising, etc.
- Start recording digitally now. Even if you are not yet required to submit quarterly updates, building the habit early saves headaches later.
- Review your record keeping process. If you currently keep paper receipts in a shoebox, that will not work under MTD ITSA. Switch to a receipt scanning app.
If your income is close to or above the £50,000 threshold, we recommend a review of your current record keeping setup. A structured conversation now can prevent a penalty later.
What happens if you ignore MTD ITSA?
HMRC has made clear that MTD ITSA is mandatory for those within scope. Ignoring it will result in penalties for late submission and potentially for failure to keep adequate records.
The penalty regime under MTD ITSA is designed to escalate. First late submission: a fixed penalty. Second late submission in the same year: a higher fixed penalty. Continued non-compliance can lead to daily penalties and, in extreme cases, HMRC issuing a determination of your tax liability based on estimated figures.
If you are unsure whether MTD ITSA applies to you, check your qualifying income for the 2025/26 tax year. That is the base year that determines whether you must comply from April 2026.
For more detailed guidance on sole trader responsibilities, including how MTD ITSA interacts with self assessment, see our dedicated section.
Final thoughts
MTD ITSA is not a distant future change. It is 12 months away for sole traders with income over £50,000. The record keeping requirements are specific but manageable if you have the right software and processes in place.
The key takeaway is this: you must keep digital records of all business income and expenses, submit quarterly updates to HMRC, and retain those records for at least three years after the relevant tax year. Paper records and manual spreadsheets will not meet the requirement unless linked to compatible software.
If you need help setting up your digital record keeping system or understanding whether MTD ITSA applies to your business, contact our team. We work with sole traders across the UK, from freelancers in Bristol's Harbourside to tradespeople in Leeds' city centre, and we can help you get compliant before the deadlines arrive.
Our full range of services includes MTD ITSA setup, software recommendations, and ongoing compliance support. We also have offices in multiple UK locations if you prefer face-to-face meetings.