MTD for Income Tax is live — what sole trader contractors must do now
Direct Answer
Making Tax Digital for Income Tax Self Assessment (MTD ITSA) went live on 6 April 2026 for sole traders and landlords with gross income over £50,000. If you operate through a limited company, your income is outside scope — this does not affect you. If you work as a sole trader contractor above that threshold, you must now keep digital records and submit quarterly updates to HMRC. Failure to comply attracts penalties under a new points-based system.
What is MTD ITSA and why does it matter now?
HMRC describes MTD ITSA as the "biggest change to Income Tax in over 30 years." Instead of one Self Assessment return per year, affected taxpayers now submit four quarterly digital updates to HMRC, plus a final declaration by 31 January after the tax year ends.
The aim is to bring income tax reporting closer to real time — giving HMRC better visibility of tax liabilities throughout the year. For contractors who have always filed once a year, the change in rhythm is significant.
The software requirement is non-negotiable. You must use HMRC-recognised software to keep your records and submit your updates. Spreadsheets alone are not sufficient unless they are linked to compatible bridging software.
Who is in scope — and who isn't
The rules apply to:
- Sole trader contractors and self-employed consultants with gross qualifying income over £50,000 in the 2026/27 tax year
- Landlords with rental income over the same threshold
- Anyone with a combination of sole trader and rental income totalling over £50,000
The rules do not apply to:
- Contractors operating through a limited company (PSC) — your salary and dividends from a company are not in scope
- Sole traders with gross income under £50,000 (until April 2027 at the £30,000 threshold)
If you are an AutoBooks client running a limited company, MTD ITSA does not change anything about how we handle your tax affairs. Your company tax obligations — corporation tax, VAT, payroll — are separate from MTD ITSA.
The phased rollout — thresholds by year
MTD ITSA is being introduced in stages. Even if you are not in scope now, the threshold is coming down:
- April 2026: Gross income over £50,000
- April 2027: Gross income over £30,000
- April 2028: Gross income over £20,000
If your sole trader contracting income is, say, £35,000 now, you have until April 2027 — but building digital record-keeping habits now is far easier than scrambling in 12 months.
Penalties: what happens if you miss a quarterly update?
HMRC has replaced the old fixed penalty system with a points-based regime for MTD ITSA. Miss a quarterly update and you accumulate a penalty point. Once your points reach a threshold (4 points for quarterly filers), you receive a £200 fine. Further missed submissions add £200 per event.
Points are reset after a period of full compliance. But the key point is this: the old annual return approach is gone. Missing a deadline is now a recurring risk, not a once-a-year event.
Should you incorporate to avoid MTD ITSA?
Incorporation is worth considering if you are a sole trader contractor earning above £30,000 — not purely to avoid MTD ITSA, but because a limited company structure often produces a better overall tax position.
Through a limited company, you can pay yourself an optimal salary (typically around the £9,100 NI secondary threshold or £12,570 personal allowance) and take the rest as dividends. Dividends are taxed at lower rates than self-employed income. You also pay corporation tax at 19% on profits under £50,000, rather than income tax at 20–45%.
That said, incorporation has its own costs and complications — Companies House registration, additional filing obligations, a separate bank account. It is not the right call for every contractor. Speak to us and we will give you an honest comparison for your specific situation, not a sales pitch.
For more on IR35 and how your employment status affects your tax treatment, see our IR35 guide for contractors.
What sole trader contractors need to do right now
If you are a sole trader contractor in scope from April 2026:
- Check your income: Was your gross qualifying income over £50,000 in the 2025/26 tax year? If yes, you are in scope now.
- Choose compliant software: HMRC maintains a list of recognised software providers. Your current spreadsheet will not be sufficient on its own.
- Understand the quarterly deadlines: Updates cover April–June (due 5 August), July–September (due 5 November), October–December (due 5 February), January–March (due 5 May).
- Submit your final declaration: By 31 January each year, as before — but now in addition to four quarterly updates.
- Consider whether a limited company is right for you: If your income is rising and you expect to stay above threshold, incorporation may save you money across the board — not just on MTD compliance.
Confused about whether MTD ITSA applies to you?
Book a free contractor structure review with AutoBooks — we'll confirm whether you need quarterly digital reporting or whether a Ltd company keeps you out of it.