Making Tax Digital for Sole Traders in 2026: Who Is In, 4 Deadlines, Free Software, Penalties (HMRC, Xero, FreeAgent, Jobbit Pro)

As of 3 October 2026, the next deadline is 7 November 2026. If your self-employed and rental income together was over £50,000 in the 2024 to 2025 tax year, you are in the first group, and HMRC expects a quarterly update from you by then, sent from software, whether or not anyone has told you. HMRC counted more than 864,000 sole traders and landlords in that group. By 12 August 2026 over 570,000 had signed up and more than 436,000 had sent their first update, and since September HMRC has been signing up the rest itself.

Many sole traders were not ready. A survey of 1,000 sole traders by IPSE and Sage, published in December 2025, found that only 30% clearly understood what was coming and a third still kept their records with pen and paper. This guide explains Making Tax Digital for sole traders the way a tradesperson or freelancer needs it. It covers who is in and when, every date from now to 2028, what the software really costs, how the penalties work, and a worked example with real numbers. Rules were read on GOV.UK on 3 October 2026. It is a guide, not tax advice, and Scottish income tax bands differ from the example.

How we checked this guide

1. GOV.UK first. Every rule comes from HMRC's own guidance pages, most of them updated between March and September 2026, and from the regulations that set the thresholds.

2. Prices seen on the day. Software prices were read on each company's site on 3 October 2026. FreeAgent, Xero, QuickBooks and 123 Sheets list prices excluding VAT. Coconut and Clear Books do not say, so check at checkout.

3. HMRC's own numbers. Headcounts and cost estimates are from HMRC statistics and its tax information and impact note, one source per figure.

4. Examples marked as examples. The electrician below is an illustration we calculated from the published 2026 to 2027 rates.

Who has to use Making Tax Digital, and from when

Making Tax Digital for Income Tax applies to individuals registered for Self Assessment who are self-employed, landlords, or both. It arrives in three steps, and each step looks back at an earlier tax return:

• From 6 April 2026: qualifying income over £50,000 in the 2024 to 2025 tax year.

• From 6 April 2027: qualifying income over £30,000 in 2025 to 2026.

• From 6 April 2028: qualifying income over £20,000 in 2026 to 2027.

The word that catches people is qualifying income. It means your gross income from self-employment and from property added together, before any expenses. It is turnover, not profit. A plumber who invoiced £58,000 and kept £31,000 after materials and the van is in the first group. Wages taxed through PAYE, dividends, pensions and a share of partnership profit do not count. HMRC's own example: £25,000 of rent plus £27,000 of self-employed income makes £52,000, which is over the line. HMRC's qualifying income guide lists every case.

Four more points decide whether you are in:

• You do not need a letter. Your 2024 to 2025 return set your status for this year. From September 2026 HMRC has been signing up people who qualify and have not done it themselves, using only the details it already holds.

• Limited companies are outside it. HMRC has said it does not intend to bring in Making Tax Digital for Corporation Tax. Partnerships are not included yet and have no date.

• You can leave later. Once in, you can stop if your qualifying income stays below the threshold for three tax years in a row.

• You can join early. Voluntary sign-up is open before your start date. Volunteers are not penalised for late quarterly updates, though late returns bring a £200 penalty at two points.

If you are still deciding how to trade, the sole trader vs self-employed guide compares the tax on each structure.

The Making Tax Digital calendar: every date to 2028

Two systems run side by side until the first final declaration in January 2028. Quarterly updates have already started for the first group, while last year's tax return is still filed the old way.

You may choose calendar quarters instead (to 30 June, 30 September, 31 December and 31 March) with the same four deadlines, as long as you choose before the first update of the year. Dates are from HMRC's quarterly update guidance. HMRC states the relief from points for 2026 to 2027 only, and has not said whether the second group gets a grace year of its own.

The trap is 31 January 2027. That return covers 2025 to 2026, it is filed in the old system under the old penalties, and its income figure decides whether you join the second group about nine weeks later.

Quarterly updates explained, with a worked example

What goes in an update

A quarterly update is not a tax return and not a bill. It is a set of totals sent from your software: total income and total expenses, split by category if your turnover is £90,000 or more. HMRC does not receive your receipts or invoices. Five rules make it simpler than it sounds:

• Updates are cumulative. Each one covers the start of the tax year to the end of the period, so a mistake in July is corrected in the October figures.

• You do not pay tax quarterly. Payment dates stay where they were: 31 January, with two advance payments towards the next bill (payments on account) on 31 January and 31 July.

• A quiet quarter still needs an update. No income and no expenses is still a submission.

• Each trade has its own records. Two businesses means two sets of records and two updates, plus one for any UK property.

• You can send it early. Any time from the end of the period to the deadline, or up to 10 days before the period ends if you expect no more transactions.

Each digital record needs the amount and the date, plus a category if your turnover is £90,000 or more. Below that, marking each item as income or expense is enough. You must keep the records for at least five years after the 31 January deadline. At the end of the year the tax return becomes a final declaration, sent from software. You may use a different product for it than for the updates.

Worked example: a self-employed electrician

Sam is an electrician in Leeds. His 2024 to 2025 turnover was £58,000, so he has been in Making Tax Digital since 6 April 2026. His four updates for 2026 to 2027 look like this:

• To 5 July, due 7 August 2026: income £14,500, expenses £5,200.

• To 5 October, due 7 November 2026: income £30,000, expenses £10,600.

• To 5 January, due 7 February 2027: income £45,500, expenses £16,000.

• To 5 April, due 7 May 2027: income £60,000, expenses £21,000.

His profit for the year is £39,000. With the £12,570 personal allowance, £26,430 is taxed at 20%, which is £5,286.00. Class 4 National Insurance at 6% on the same £26,430 is £1,585.80. The total of £6,871.80 is settled through his final declaration by 31 January 2028, less any payments on account. Notice what put Sam in the scheme: his £58,000 turnover in 2024 to 2025, not the profit he kept after expenses.

Software: free, cheap, and what HMRC does not provide

HMRC does not make its own Making Tax Digital software. You choose a commercial product from HMRC's software guidance, and HMRC does not recommend any of them. Prices on 3 October 2026:

• FreeAgent: £19 a month for sole traders. It is free if you hold a business account with NatWest, Royal Bank of Scotland, Ulster Bank or Mettle (Mettle needs at least one transaction a month).

• Xero: Ignite at £18 a month, limited to 20 invoices and 10 bills a month, then Grow at £39.

• QuickBooks: Sole Trader Plus at £10 a month, with 90% off for the first six months.

• Coconut: £129.99 a year for quarterly updates and the year-end declaration.

• Clear Books: a free plan for sole traders and landlords that it describes as having no time limit and no transaction limit, with paid extras such as VAT filing or payroll from £5 a month.

• Bridging software for spreadsheet users: Coconut's bridging plan is £49.99 a year, and 123 Sheets charges £19.75 plus VAT in the first year after a half-price discount.

If you are not VAT registered you pay VAT on top of the prices that exclude it, so £19 a month becomes £22.80.

Yes, you can keep your spreadsheet. HMRC allows spreadsheet records as long as bridging software sends the figures. The catch is the digital link rule: once a figure is in your records, it must travel to the submission electronically, not by retyping or copy and paste.

HMRC's tax information and impact note, republished in September 2025, estimated the average extra cost for the first group at about £285 to set up and £115 a year after that. If you would rather hand it over, four firms' published prices on 3 October 2026 ranged from £15 a month plus a set-up fee from £199 for the quarterly updates alone, to £49 a month plus VAT for software, four updates and the final declaration, with fuller packages from £79 plus VAT. HMRC's statistics on 2023 to 2024 returns show 75% of people with qualifying income over £50,000 already used an accountant or another tax agent. Your accountant must sign you up individually: their existing authority does not do it for you.

Penalties: points, pounds and the grace year

For the 2026 to 2027 tax year HMRC gives no penalty points for late quarterly updates. That is a grace year, not a holiday. You still have to send all four updates before you can file, and a late 2026 to 2027 tax return, due 31 January 2028, does earn a point.

From the 2027 to 2028 tax year points for late quarterly updates start, according to HMRC's penalties guidance:

• One point for each missed deadline, whether a quarterly update or the return.

• Four points means a £200 penalty, and another £200 for every later miss while you stay at four.

• Points expire after 24 months if you stay below four. Once at four, you clear them only with 12 months of on-time submissions and by filing everything outstanding.

Late payment is separate, and it applies to the balancing payment, not to payments on account. There is no penalty if you pay within 15 days of the due date. For 2026 to 2027, your first year under the new rules, you get 30 days, once, to pay in full or agree a payment plan. If you are more than 30 days late, HMRC charges 3% of the tax unpaid at day 15, another 3% of the tax unpaid at day 30, and then 10% a year on what is still owed. For 2027 to 2028 the two 3% charges become 4%. If Sam owed the full £6,871.80 with no payments on account, each 3% step would be £206.15. Late payment interest is charged on top at the Bank of England base rate plus 4%, which is 7.75% with the base rate at 3.75%. If you contact HMRC early and agree a payment plan, penalties are paused for as long as you keep to it. Interest still builds.

Exemptions: who does not have to do this

Some people are exempt automatically, with no application:

• Qualifying income of £20,000 or less.

• No National Insurance number.

• People acting for someone else, such as trustees and the personal representatives of someone who has died.

• People with a power of attorney or a court-appointed deputy, unless circumstances change.

• A temporary group, until April 2027, whose 2024 to 2025 return included items such as averaging relief (used mainly by farmers and creative workers) or qualifying care relief (foster carers and shared lives carers).

Everyone else who cannot use software has to apply as digitally excluded. HMRC accepts reasons such as age, health or disability, living where there is no internet access, or religious beliefs that rule out computers. It does not accept, on their own, having always filed on paper, being unfamiliar with software, or the extra time and cost. You apply by phone or letter, not online, and should do it before your start date. HMRC's exemption guidance lists the details. If you are exempt, you carry on filing a normal Self Assessment return.

The weekly routine, and how an AI agent helps

Ten minutes a week

• One business account. Pay everything for the business from it and connect the bank feed to your software.

• Photograph receipts on the day. Materials, fuel, tools, parking. A receipt in the van door pocket is a receipt you will not find in January.

• Sort once a week. Mark each item as income or expense, and add a category if your turnover is £90,000 or more.

• Check in the first week after each quarter. Look at the cumulative totals, fix anything odd, and send the update well before the 7th.

• Keep everything for five years.

What an AI agent can and cannot do

Be clear about the limit first: a general AI agent is not HMRC-recognised software and cannot send your quarterly update. ChatGPT, Claude, Gemini, Microsoft Copilot, Manus and Meta's Muse can explain the rules, and so can Jobbit's agent. Where an agent helps is the preparation around the software. Delete your tax reference, National Insurance number and bank details before you paste anything, then try:

Here is my bank export for 6 April to 5 July. Mark each line as income or expense, flag anything that looks personal, and list payments with no receipt.

• Sorts a bank export. Every line marked as income or expense with a suggested category, ready for your software or your bridging spreadsheet. Check each line yourself, because you are responsible for your records.

• Finds the gaps. Ask which payments have no matching receipt and which invoices are still unpaid.

• Explains HMRC letters. Paste the letter in and ask what it wants and by when.

• Drafts your reminders. Ask for a checklist for each 7th, then put the dates in your own calendar.

• Makes the invoices that feed the records. The free invoice generator produces numbered invoices, and the invoice guide covers what each one must show.

• Pays out to your business account. On Jobbit Pro the customer's payment is held in escrow before you start and released when they approve the job. Withdrawals reach your UK bank in 1 to 5 business days, where your software's bank feed picks them up. There is no subscription, and a fee applies only when a paid job completes.

• Free agent credits from the first day. A new account gets a 300-credit sign-up bonus on top of 100 free credits every day, with no card.

• A website when your profile is complete. Finish your Jobbit Pro profile and you get a website for your services with an enquiry form.

The wider toolkit is in the guide to AI tools for UK freelancers.

Mistakes to avoid

• Reading £50,000 as profit. The test is turnover before expenses, from self-employment and property together.

• Waiting for a letter. Your old return already decided it, and HMRC is now signing people up itself.

• Looking for HMRC's free software. There is none. Free options exist, but they are commercial products with limits.

• Copying figures by hand. Retyping totals from a spreadsheet into another tool breaks the digital link rule. Use bridging software.

• Forgetting 31 January 2027. Last year's return is still due the old way, with the old £100 penalty.

• Skipping a quiet quarter. A nil update is still an update.

• Assuming the accountant has signed you up. Ask them to confirm, in writing, that you are signed up and who sends each update.

Your plan for the next 30 days

• Week 1: find out where you stand. Look up your turnover for 2024 to 2025 and, from your own records, for 2025 to 2026. Over £50,000 in the first means you are in now. Over £30,000 in the second means you start on 6 April 2027.

• Week 2: choose the software. If you bank with NatWest, RBS, Ulster Bank or Mettle, start with the free FreeAgent offer. If you love your spreadsheet, choose a bridging tool. Otherwise compare two paid plans on their limits, not their discounts.

• Week 3: bring the records up to date. If you are in now, enter or import everything since 6 April and send any update that is overdue. There are no points for late updates this year, so late is far better than never. If you start in 2027, use the time to practise.

• Week 4: set the routine. Receipts on the day, sorting once a week, a reminder a week before each 7th. Then create your Jobbit Pro profile so new work comes with the payment already held.

Frequently asked questions

Do I need to sign up for Making Tax Digital as a sole trader?

Yes, if your qualifying income was over £50,000 in the 2024 to 2025 tax year, in which case you should already be using it. The threshold falls to £30,000 from 6 April 2027 and to £20,000 from 6 April 2028. HMRC has been signing up people who qualify and have not registered since September 2026.

Is the Making Tax Digital £50,000 limit based on turnover or profit?

Turnover. Qualifying income is your gross income from self-employment and property combined, before expenses. Someone who invoices £58,000 and makes £39,000 profit is over the threshold.

When are Making Tax Digital quarterly updates due?

On 7 August, 7 November, 7 February and 7 May. The update for 6 April to 5 October 2026 is due on 7 November 2026. Updates are cumulative, so each covers the whole tax year to date.

Do I pay tax quarterly under Making Tax Digital?

No. Quarterly updates are summaries, not bills. Tax is still due on 31 January, with payments on account on 31 January and 31 July where they apply.

Is there free software for Making Tax Digital, and does HMRC provide any?

HMRC does not provide its own software. Free commercial options exist: FreeAgent is free with a NatWest, RBS, Ulster Bank or Mettle business account, and some providers offer free plans with limits. Bridging software for spreadsheets costs about £50 a year at Coconut, or about £20 plus VAT in the first year at 123 Sheets.

What happens if I miss a quarterly update?

In the 2026 to 2027 tax year, no penalty points are given for late quarterly updates, but you must still send them before you can file your return. From 2027 to 2028 each missed deadline earns one point, and four points bring a £200 penalty.

Can I still use a spreadsheet for Making Tax Digital?

Yes, with HMRC-recognised bridging software that sends the figures from the spreadsheet. You must not retype or copy and paste totals between tools once they are in your records.

How can I keep on top of Making Tax Digital with less admin?

Keep one business account, photograph receipts on the day and sort them weekly, then let software send the update. For work where the payment is held before you start, create a free Jobbit Pro profile: 300 free agent credits on sign-up plus 100 a day, a website when your profile is complete, payment held in escrow before work starts, and no fee until a paid job completes.