# What Accounting Software Do UK Sole Traders Need for MTD Phase 1 in April 2026?

Last updated: 22 September 2026

UK sole traders and landlords with qualifying income over £50,000 must use HMRC-recognised software for digital record-keeping and quarterly income and expense updates from April 2026. This can be either comprehensive accounting software or bridging software used with spreadsheets.

## Making Tax Digital for Income Tax: The New Era of Tax Reporting

The landscape of tax reporting for self-employed individuals and landlords in the UK is undergoing a significant transformation with the introduction of Making Tax Digital for Income Tax Self Assessment, or MTD ITSA. From April 2026, this initiative will become mandatory for millions of businesses, fundamentally changing how income and expenses are recorded and reported to HMRC. The core principle of MTD ITSA is to digitise tax administration, making it easier for taxpayers to get their tax right and keep their financial affairs up-to-date.

This comprehensive guide is designed to equip UK sole traders and landlords with the essential knowledge needed to navigate MTD ITSA Phase 1. We will delve into who is affected, the critical requirements, and most importantly, what accounting software you will need to ensure compliance. Understanding your obligations and selecting the right HMRC-recognised software is paramount for a smooth transition and to avoid potential penalties. Prepare to embrace a more digital, integrated, and efficient way of managing your business finances and tax.

## Understanding Making Tax Digital for Income Tax Self Assessment (MTD ITSA)

MTD ITSA is HMRC's flagship programme to modernise the tax system. It moves away from the traditional annual Self Assessment tax return towards a system of digital record-keeping and regular, usually quarterly, updates. The aim is to reduce errors, provide taxpayers with a clearer view of their tax position throughout the year, and make tax administration more efficient.

### What is MTD ITSA?

At its heart, MTD ITSA requires businesses to keep digital records of their income and expenses and to submit summary updates to HMRC every quarter using MTD-compatible software. These quarterly updates are followed by an End of Period Statement (EOPS) and a Final Declaration, which collectively replace the annual Self Assessment tax return for income sources covered by MTD.

### Key Dates and Thresholds for Mandatory Participation

| Period | Detail | Note |
| --- | --- | --- |
| Start Date | April 2026 | For businesses with income over £50,000 |
| Next Phase | April 2027 | For businesses with income over £30,000 |
| Reporting | Quarterly | Income and expenses updates |

It is crucial for sole traders and landlords to understand these thresholds and dates. If your gross income from self-employment and/or property exceeds £50,000 in the tax year 2024-2025, you will be mandated to join MTD ITSA from April 2026. This means your first quarterly update will be due for the period starting April 2026. For those with income between £30,000 and £50,000, the mandate begins in April 2027.

### Who is Affected by MTD ITSA?

- **Self-employed individuals:** This includes freelancers, contractors, sole traders, and anyone earning income from a trade, profession, or vocation.
- **Landlords:** Individuals who receive income from UK or overseas property. This applies whether you own one property or a portfolio.
- **Combined income:** If you are both self-employed and a landlord, your combined gross income from these sources determines if you meet the threshold.

### Who is Exempt from MTD ITSA?

While MTD ITSA aims for broad coverage, certain individuals and businesses are exempt:

- **Low income:** Those whose gross income from self-employment and property is below the mandatory threshold (£50,000 from April 2026, £30,000 from April 2027).
- **Specific circumstances:** Individuals who cannot comply with MTD due to reasons such as age, disability, remote location without internet access, or religious objections may be granted an exemption. Applications must be made to HMRC.
- **Trusts, estates, and non-resident companies:** These entities are currently outside the scope of MTD ITSA.

## Core Requirements of MTD for Income Tax

Meeting MTD ITSA obligations involves more than just submitting data. It requires a fundamental shift in how you manage your financial records throughout the tax year. There are three primary components: digital record keeping, quarterly updates, and the End of Period Statement followed by a Final Declaration.

### 1. Digital Record Keeping

This is the foundation of MTD ITSA. You must keep digital records of all your business income and expenses. This means no more shoeboxes of receipts or handwritten ledgers for MTD-covered income. HMRC specifies that these records must be kept in a "functional compatible software" or a set of software programmes that can interact with each other.

**What to record digitally:**

- **Income:** Date, amount, and category of all business income. For landlords, this includes rent received, ground rents, etc.
- **Expenses:** Date, amount, category, and a description of all business expenses. This covers everything from office supplies and utilities to professional fees and travel costs.
- **Specific details:** For each transaction, you need to record sufficient detail to identify its nature. For example, for an expense, the supplier's name might be useful but is not always mandatory for HMRC.

Digital records must be maintained continuously and accurately. This is where MTD-compatible software becomes indispensable, as it automates much of this process.

### 2. Quarterly Updates (Income and Expenses Summary)

Every three months, you will need to send a summary of your business income and expenses to HMRC using your MTD-compatible software. These are not full tax returns, but rather summaries designed to give HMRC an ongoing picture of your financial activity.

**Standard Quarterly Reporting Periods and Deadlines:**

| Tax Year Quarter | Period End Date | Submission Deadline |
| --- | --- | --- |
| Quarter 1 | 5 July | 5 August |
| Quarter 2 | 5 October | 5 November |
| Quarter 3 | 5 January | 5 February |
| Quarter 4 | 5 April | 5 May |

You can choose to align your quarterly periods with calendar quarters or your business's accounting period if HMRC approves it. Each quarterly update will provide you with an estimated tax liability, helping you plan for your tax payments.

### 3. End of Period Statement (EOPS) and Final Declaration

After your final quarterly update for the tax year, you must submit an End of Period Statement (EOPS) for each business or property income source. This statement allows you to:

- Make any accounting adjustments that were not included in the quarterly updates, such as accruals, prepayments, or stock valuations.
- Claim any reliefs or allowances applicable to your business, such as capital allowances.
- Finalise your business's taxable profits or losses for the year.

The deadline for submitting your EOPS is the same as the Self Assessment deadline for the tax year, which is typically 31 January following the end of the tax year.

Finally, you will submit a **Final Declaration**. This consolidates all your income sources, including any that are not covered by MTD ITSA (e.g., employment income, dividends), and officially calculates your final tax liability for the year. This declaration effectively replaces the Self Assessment tax return. The deadline for the Final Declaration is also 31 January following the end of the tax year.

## HMRC-Recognised Software for MTD ITSA

The cornerstone of MTD ITSA compliance is the use of "functional compatible software." This is not just any software; it must be recognised by HMRC as capable of keeping digital records and submitting the required updates directly to HMRC's systems.

### What Constitutes "HMRC-Recognised Software"?

HMRC maintains a list of software providers whose products have been tested and approved to meet MTD ITSA requirements. This means the software can:

- Store digital records of income and expenses in the prescribed format.
- Generate summary updates for each quarterly period.
- Transmit these updates directly to HMRC' via their Application Programming Interface (API).
- Handle the End of Period Statement and Final Declaration submissions.

It is vital to choose software from this list to ensure you remain compliant. Using non-recognised software will not fulfil your MTD obligations.

### Categories of MTD-Compliant Software

HMRC-recognised software generally falls into two main categories, each with distinct features and suitability for different types of businesses.

#### Full Accounting Software

Comprehensive platforms that manage all aspects of your business finances, including invoicing, bank reconciliation, expense tracking, and MTD submissions.

**Pros:**

- Automates most tasks
- Real-time insights
- End-to-end compliance
- Scalable

**Cons:**

- Higher cost
- Steeper learning curve initially

**Best suited for:** Growing businesses, high transaction volume, those seeking full financial oversight.

#### Bridging Software

Connects your existing spreadsheets to HMRC, allowing you to submit MTD updates without switching to a full accounting package.

**Pros:**

- Retain spreadsheets
- Lower cost (often)
- Simpler transition

**Cons:**

- Less automation
- No real-time insights
- Manual data entry prone to errors

**Best suited for:** Businesses comfortable with spreadsheets, lower transaction volume, cost-conscious.

### Using Spreadsheets with Bridging Software

HMRC understands that many sole traders and landlords are comfortable and efficient using spreadsheets for their record keeping. MTD ITSA does not prohibit the use of spreadsheets, but it does require that they are "digitally linked" to HMRC. This is where bridging software comes in.

Bridging software acts as an intermediary. You continue to maintain your income and expense records in a spreadsheet, but then the bridging software extracts this data and sends it to HMRC in the MTD-compliant format. This allows for a less disruptive transition for those deeply ingrained in spreadsheet-based accounting.

However, it is crucial that your spreadsheet records meet HMRC's digital record-keeping requirements. This means ensuring all necessary data points are captured and that the data is not manually re-entered into the bridging software, as this breaks the "digital link." Any adjustments or calculations made in the spreadsheet must be part of a digital process.

### Key Features to Look for in MTD Software

When evaluating MTD-compatible software, consider these essential features:

- **User-Friendly Interface:** Ease of use is paramount. The software should be intuitive, even for those new to digital accounting.
- **Automated Bank Feeds:** Connects directly to your bank accounts, automatically importing transactions and reducing manual data entry.
- **Expense Tracking and Categorisation:** Allows easy recording and categorisation of expenses, often with receipt capture features, ensuring all allowable deductions are claimed.
- **Invoice Generation:** For sole traders, the ability to create and send professional invoices directly from the software is a significant time-saver.
- **Real-time Reporting:** Provides up-to-date insights into your income, expenses, and estimated tax liability throughout the year.
- **MTD Quarterly Update Submission:** The core MTD functionality, enabling direct submission to HMRC.
- **EOPS and Final Declaration Support:** Ensures that beyond quarterly updates, the software also facilitates the annual statements.
- **Integration Capabilities:** Can it connect with other business tools you use, such as payment gateways or CRM systems?
- **Customer Support:** Access to reliable support is crucial, especially during the initial transition period.
- **Pricing Model:** Consider the cost structure and whether it aligns with your budget and anticipated usage.

## Choosing the Right MTD Software for Your Business

The decision of which MTD-compliant software to adopt is a critical one. It should align with your business's specific needs, your comfort level with technology, and your future growth aspirations.

### Assessing Your Current Situation

Before diving into software options, take stock of your current accounting practices:

- **Spreadsheet user:** Are you highly proficient and comfortable with spreadsheets? Do you want to continue using them?
- **Manual records:** Do you currently keep paper or very basic digital records? This might mean a bigger leap to full accounting software.
- **Existing software:** If you already use software, is it MTD-compliant? If not, what features are you missing?
- **Transaction volume:** How many income and expense transactions do you typically have per month? High volumes favour full accounting software.

### Factors to Consider When Choosing

- **Business Size and Complexity:** A simple sole trader with few transactions might find bridging software sufficient, while a growing business with multiple income streams will benefit from full accounting software.
- **Your Comfort with Technology:** If you are tech-savvy and enjoy exploring new tools, full accounting software might be an exciting upgrade. If you prefer minimal change, bridging software could be less daunting.
- **Specific Industry Needs:** Some industries have unique accounting requirements. Ensure the software can handle these, or integrate with specialist tools.
- **Budget:** Software costs vary significantly, from free options (often with limitations) to premium packages. Balance features against your budget.
- **Growth Potential:** Consider if the software can scale with your business. Migrating software later can be a complex task.

### Comparison: Full Accounting Software vs. Bridging Software

| Feature/Aspect | Full Accounting Software | Bridging Software (with Spreadsheets) |
| --- | --- | --- |
| Digital Record Keeping | Integrated, automated, comprehensive. | Manual entry into spreadsheets, then linked. |
| Quarterly Updates | Automated generation and submission. | Extracts from spreadsheet, then submits. |
| Real-time Insights | Excellent, dashboards, forecasts. | Limited, depends on spreadsheet setup. |
| Bank Reconciliation | Automated bank feeds, smart matching. | Manual reconciliation within spreadsheets. |
| Invoice/Billing | Integrated invoicing, payment tracking. | Requires separate invoicing solution. |
| Learning Curve | Moderate to steep, but long-term benefits. | Lower, if already proficient with spreadsheets. |
| Cost | Typically higher monthly/annual fees. | Generally lower, or free with existing spreadsheets. |
| Error Reduction | High, due to automation and digital links. | Moderate, manual spreadsheet entry risks errors. |

### Worked Examples and Scenarios

Let us consider a few scenarios to illustrate the choice:

#### Scenario 1: The Established Freelancer

**Profile:** Sarah is a freelance graphic designer with an annual income consistently above £60,000. She has around 20-30 invoices per month and a similar number of expenses. She currently uses a basic spreadsheet for tracking but finds it time-consuming to manually categorise everything and reconcile with her bank statements. She is comfortable with new technology.

**Recommendation:** Sarah would greatly benefit from a full accounting software package like AccountsOS. The automated bank feeds, expense categorisation, and integrated invoicing features would save her considerable time. The real-time reporting would give her better financial oversight, helping her plan for her quarterly tax payments more effectively. The initial learning curve would be quickly offset by increased efficiency and reduced stress.

#### Scenario 2: The Part-time Landlord

**Profile:** David owns three rental properties, generating a combined gross income of £55,000 per year. His expenses are relatively few and predictable each month. He has meticulously managed his finances in a well-organised spreadsheet for years and is hesitant to change his system. He is not particularly tech-savvy beyond his spreadsheet.

**Recommendation:** For David, bridging software would likely be the most suitable option. It allows him to continue using his trusted spreadsheet system, which he finds efficient for his specific needs. The bridging software would provide the necessary digital link to HMRC without forcing him to learn an entirely new accounting system, minimising disruption and potential frustration. He must ensure his spreadsheet is structured to capture all required MTD data points.

#### Scenario 3: The Expanding Sole Trader

**Profile:** Emily runs an online retail business with an income of £70,000. She's currently managing her records with a mix of spreadsheets and manual entries. She anticipates hiring her first employee next year and is looking to expand her product lines. She wants a system that can grow with her.

**Recommendation:** Emily should opt for a full accounting software solution. While bridging software might cover her immediate MTD needs, it would not provide the scalability and additional features she will require for growth. A comprehensive package can handle payroll, inventory management, more complex reporting, and potentially integrate with e-commerce platforms, offering a robust solution for her expanding business.

## AccountsOS: Your Partner for MTD for Income Tax Compliance

AccountsOS is designed to simplify MTD for Income Tax for sole traders and landlords, offering a comprehensive and intuitive platform that meets all HMRC requirements. We understand the challenges of transitioning to a new tax system, and our software is built to make that process as seamless as possible.

### How AccountsOS Supports MTD ITSA Requirements

- **Effortless Digital Record Keeping:** AccountsOS provides an easy-to-use interface for recording all your income and expenses digitally. Connect your bank accounts for automated transaction imports and categorisation. Capture receipts in your mobile browser today. The native Finn app is coming soon for iOS and Android.
- **Automated Quarterly Updates:** With your digital records in place, AccountsOS automatically compiles your income and expense summaries for each quarter. Review the data, and with a few clicks, submit it directly to HMRC, ensuring timely compliance.
- **Guidance for EOPS and Final Declaration:** AccountsOS provides the necessary reports and guidance to help you prepare your End of Period Statements and Final Declaration accurately, ensuring all adjustments and reliefs are correctly applied.
- **Real-time Financial Insights:** Our dashboards give you an instant overview of your financial health, estimated tax liability, and cash flow, empowering you to make informed decisions and plan for tax payments.
- **Deadline Reminders:** Never miss a submission or payment deadline with automated reminders tailored to your accounting periods.

AccountsOS is more than just MTD software; it's a complete accounting solution designed to give you clarity and control over your business finances, simplifying compliance and freeing up your time to focus on what you do best.

## Transitioning to MTD for Income Tax: A Step-by-Step Guide

Preparing for MTD ITSA does not have to be daunting. By following a structured approach, you can ensure a smooth transition and maintain compliance from day one.

1. **Understand if You're Affected.** Confirm your gross income from self-employment and property. If it exceeds £50,000 in the 2024-2025 tax year, you are mandated to join MTD ITSA from April 2026.
2. **Choose Your Software.** Select an HMRC-recognised accounting software or bridging software that best suits your business needs and comfort level. Consider features, cost, and scalability.
3. **Register for MTD ITSA.** Once you have your software, register with HMRC for MTD ITSA. You will need your Government Gateway user ID and password. Ensure you do this at least a few weeks before your first quarterly update deadline.
4. **Set Up Digital Records.** Configure your chosen software to start recording all your business income and expenses digitally from the start of your first MTD tax year (April 2026 for Phase 1). Connect bank feeds for automation.
5. **Practice Quarterly Updates.** Even before mandatory submission, familiarise yourself with the process of generating and reviewing quarterly summaries within your software. This builds confidence.
6. **Submit Your First Quarterly Update.** For the period April to July 2026, submit your first quarterly update by 5 August 2026. Review the summary carefully before sending it to HMRC.
7. **Prepare and Submit EOPS and Final Declaration.** After the final quarterly update, prepare your End of Period Statement and then the Final Declaration. These will be due by 31 January following the end of the tax year.

## Penalties for Non-Compliance with MTD ITSA

HMRC is introducing a new points-based penalty system for MTD ITSA, designed to be fairer and more proportionate than previous penalty regimes. However, consistent non-compliance will still result in financial penalties.

### The New Points-Based Penalty System

This system applies to late submissions of quarterly updates, EOPS, and the Final Declaration.

- **Points for late submissions:** For each missed deadline, you will receive one point.
- **Penalty threshold:** Once you reach a certain number of points within a rolling 12-month period, you will incur a financial penalty. The threshold depends on how frequently you are required to submit returns (e.g., four points for annual filers, two for quarterly filers).
- **Financial penalties:** Each time you reach the penalty threshold, you will receive a £200 penalty.
- **Points expiry:** Points expire after 12 months, or after a period of good compliance, encouraging taxpayers to get back on track.

### Penalties for Late Payments and Inaccurate Submissions

Separate penalties apply for late tax payments and for submitting inaccurate information:

- **Late payment penalties:** These are tiered, starting with a 2% penalty if the tax is unpaid 30 days after the due date, rising to 4% after 6 months, and 5% after 12 months. Interest is also charged on unpaid tax.
- **Inaccuracy penalties:** If you submit an inaccurate return, you could face penalties ranging from 0% to 100% of the additional tax due, depending on whether the inaccuracy was careless, deliberate, or concealed.

The best way to avoid penalties is to ensure you use MTD-compliant software, maintain accurate digital records, and submit all required updates and declarations on time.

## Benefits of Embracing MTD for Income Tax

While the transition to MTD ITSA requires effort, the long-term benefits for sole traders and landlords are significant, extending beyond mere compliance.

- **Improved Accuracy:** Digital record-keeping and automated submissions reduce the scope for human error, leading to more accurate tax calculations and fewer mistakes.
- **Better Financial Oversight:** Quarterly updates and real-time reporting provide a clearer, more up-to-date picture of your business's financial performance throughout the year, not just at year-end.
- **Proactive Tax Planning:** Knowing your estimated tax liability quarterly allows you to budget and set aside funds for tax payments, avoiding year-end surprises and cash flow issues.
- **Reduced Administrative Burden (Long-term):** While there's an initial setup, automated processes and integrated systems can significantly reduce the time spent on manual bookkeeping and tax preparation.
- **Reduced Risk of Penalties:** Timely digital submissions and accurate records minimise the chance of incurring penalties for late filing or errors.
- **Enhanced Business Decision-Making:** Access to real-time financial data enables you to make more informed decisions about pricing, investments, and growth strategies.

## Future of MTD ITSA: What Comes Next?

Making Tax Digital is an ongoing programme, and the April 2026 rollout for those with income over £50,000 is just the first phase for Income Tax Self Assessment.

### April 2027: Lower Thresholds

From April 2027, the mandatory threshold for MTD ITSA will reduce to £30,000. This means that if your gross income from self-employment and/or property is between £30,000 and £50,000 in the 2025-2026 tax year, you will be required to join MTD ITSA from April 2027. This expansion will bring a significant number of additional sole traders and landlords into the digital tax system.

### Potential for Further Expansion

While HMRC has paused further threshold reductions for the time being, the long-term vision for MTD is to extend digital record-keeping and reporting to nearly all businesses and individuals. This includes potentially bringing those with income below £30,000 into the scope in future years, as well as exploring MTD for other tax regimes.

Staying informed about HMRC's announcements and preparing for these changes proactively will be key to ongoing compliance. Embracing digital accounting now, even if not yet mandated, can position your business advantageously for future tax transformations.

## How AccountsOS Simplifies MTD ITSA Compliance

We make digital record-keeping and quarterly submissions effortless, so you can focus on your business.

### Digital Record Keeping

Easily record all income and expenses digitally, meeting HMRC's MTD requirements.

### Automated Quarterly Updates

Generate and submit your quarterly income and expense summaries directly to HMRC with a few clicks.

### Compliance Alerts

Receive timely reminders for MTD deadlines, End of Period Statements, and Final Declarations.

### Financial Overview

Gain real-time insights into your business performance, helping with tax planning and cash flow.

## Frequently asked questions

### Do I have to use software for MTD for Income Tax?

Yes, from April 2026, if your qualifying income is over £50,000, you must use HMRC-recognised software to keep digital records and submit quarterly updates. This replaces the traditional annual Self Assessment.

### What if my income is below the threshold?

If your qualifying income is below £50,000 in April 2026 (or £30,000 in April 2027), you are not mandated to join MTD ITSA, but you can choose to do so voluntarily. It will become mandatory for lower thresholds in future phases.

### Can I still use spreadsheets for my records?

Yes, but only if you use 'bridging software' to connect your spreadsheets to HMRC's MTD system. This software takes the data from your spreadsheets and submits it in an MTD-compliant format.

### What are 'qualifying income' and 'taxable profits'?

Qualifying income refers to your gross income from self-employment and/or property. Taxable profits are calculated after deducting allowable business expenses, which is what your tax is ultimately based on.

### What is an End of Period Statement (EOPS)?

The EOPS is an annual declaration that allows you to make accounting adjustments, claim reliefs, and finalise your business income and expenses for the tax year before making your final tax declaration.

### When do I need to register for MTD for Income Tax?

You should register for MTD for Income Tax once you are sure you meet the income threshold and have chosen your HMRC-recognised software. HMRC will also be in contact with eligible individuals.

### What happens if I miss a quarterly update deadline?

HMRC is introducing a new points-based penalty system for MTD ITSA. You will incur points for late submissions, which can lead to financial penalties if you accumulate too many points.

### Will MTD ITSA replace my Self Assessment tax return entirely?

For income sources covered by MTD ITSA, the quarterly updates, EOPS, and Final Declaration will replace the Self Assessment tax return. Any non-MTD income will still need to be declared as part of the Final Declaration.

## Related guides

- [MTD Registration Guide](/guides/mtd-registration)
- [Understanding MTD Penalties](/guides/mtd-penalties)
- [Digital Record Keeping Tips](/blog/digital-record-keeping)