Making Tax Digital (MTD) for Income Tax changes how eligible sole traders record, organise and report their business finances. Instead of keeping records primarily for an annual Self Assessment return, affected sole traders must maintain digital records and use compatible software to send quarterly updates to HMRC.
From 6 April 2026, MTD for Income Tax applies to sole traders and landlords with qualifying income above £50,000. The threshold is scheduled to fall to more than £30,000 from April 2027 and more than £20,000 from April 2028.
Qualifying income is based on relevant gross income rather than profit after expenses. For sole traders, understanding exactly what must be recorded is therefore important.
MTD does not mean every financial document must be entered into accounting software in exactly the same format. It means relevant business income and expenses must be recorded digitally, accurately categorised where required, supported by appropriate documentation and retained for the required period.
This guide explains what digital records sole traders must keep under MTD, what information each record needs to contain, how supporting documents fit into the system and how good record keeping can make quarterly reporting easier.
What Is Making Tax Digital for Income Tax?
Making Tax Digital for Income Tax is HMRC’s system for digital record keeping and reporting for eligible sole traders and landlords.
Under the system, affected taxpayers or their authorised accountants must use compatible software to create, store and correct digital records of relevant self-employment and property income and expenses.
The system introduces a regular reporting cycle. Rather than waiting until the end of the tax year to organise all business transactions, sole traders need to maintain records throughout the year and use those records to prepare quarterly updates.
Quarterly updates are summaries of income and expenses. They are not four separate annual tax returns. The annual tax return and final tax calculation remain important parts of the process.
Digital records therefore form the foundation of the MTD reporting process. Every relevant business transaction should be captured in a reliable digital system, supported by appropriate evidence and categorised correctly.
Who Needs to Keep Digital Records Under MTD?
Not every sole trader is currently required to use MTD for Income Tax. The rules depend primarily on qualifying income and the relevant tax year.
From 6 April 2026, eligible sole traders and landlords with qualifying income above £50,000 must use MTD for Income Tax. The threshold is scheduled to reduce to more than £30,000 from April 2027 and more than £20,000 from April 2028.
Qualifying income generally considers gross income from relevant self-employment and property sources. Sole traders should therefore not simply look at their profit after expenses when determining whether they exceed the MTD threshold.
For example, if a sole trader receives £65,000 in business sales and has £20,000 of allowable business expenses, the relevant income figure for determining the MTD threshold is not automatically the £45,000 profit.
If you are unsure whether your income places you within the current MTD requirements, reviewing your previous Self Assessment figures and qualifying income is a sensible starting point. You can also explore AccountancyNet’s Self Assessment service for professional support with tax reporting.
What Digital Records Must a Sole Trader Keep?
Under MTD, the core requirement is to create and store digital records of relevant self-employment income and expenses.
Each digital income or expense record generally needs to contain:
- The amount
- The relevant date
- The appropriate category
Depending on the business, records may cover:
- Sales and business income
- Customer payments
- Fees and commissions
- Business purchases
- Stock and materials
- Travel and business mileage
- Office costs
- Financial costs
- Professional services
- Business insurance
- Equipment and other purchases
- Bank transactions
- Payment processing charges
- Refunds and adjustments
The purpose is not simply to have a spreadsheet containing an annual turnover figure. Digital records need to support the income and expense figures used for MTD reporting.
1. Digital Records of Business Income
The first major category is income from the sole trader’s business.
This can include sales of products, professional fees, consultancy income, commissions, contract payments and other receipts generated through the trade.
For each relevant transaction, the digital record should contain the appropriate amount, date and category.
Examples for service businesses
A service-based business might record:
- Invoice income
- Customer payments
- Consultancy fees
- Project fees
- Retainer payments
- Commission income
Examples for retail businesses
A retail business may need records covering:
- Individual sales
- Cash takings
- Card payments
- Online sales
- Marketplace sales
Retailers may, in certain circumstances, use daily gross takings rather than recording every individual sale. The precise requirements depend on the applicable rules and how the business operates.
E-commerce businesses should take particular care because the amount paid into the bank account may not equal gross sales. Payment platforms can deduct transaction fees, refunds, commissions and other charges before transferring money to the business.
The accounting records should therefore distinguish between gross sales and relevant deductions.
2. Digital Records of Business Expenses
Sole traders must also maintain digital records of relevant business expenses.
Depending on the business, these can include:
- Stock purchases
- Raw materials
- Business travel
- Office rent
- Utilities
- Telephone and internet costs
- Business insurance
- Accountancy fees
- Advertising and marketing
- Software subscriptions
- Bank charges
- Payment processing fees
- Repairs and maintenance
- Professional services
- Equipment
An expense being recorded digitally does not automatically mean it is an allowable tax deduction.
For example, a purchase may be partly business and partly private. The records should provide enough information for the correct tax treatment to be determined.
3. The Amount of Each Transaction
The amount is one of the key pieces of information required for each digital record.
A sole trader should record the relevant transaction amount accurately rather than relying on an estimate.
For example, if a business purchases equipment for £1,250, the digital accounting record should reflect the relevant amount.
If VAT is involved, the appropriate treatment depends on the business’s VAT status and the nature of the transaction. VAT-registered sole traders may also have VAT record-keeping and MTD for VAT responsibilities alongside MTD for Income Tax.
Businesses that need help managing these obligations can explore AccountancyNet’s VAT and accounting support.
4. The Date of the Transaction
Digital records also need the relevant transaction date.
For income, this generally relates to when the income was received. For expenses, the relevant date depends on the applicable record-keeping rules.
Recording transactions promptly is important because MTD quarterly updates are based on reporting periods.
A payment received near the end of a quarter, for example, needs to be recorded accurately so that the correct figures are included in the appropriate reporting period.
Maintaining records throughout the year is therefore preferable to creating a large backlog before a quarterly deadline.
5. Income and Expense Categories
Digital records also need the appropriate category.
MTD for Income Tax uses income and expense categories that correspond with the Self Assessment system. The level of categorisation required can depend on the circumstances and size of the business.
A small consultant, online retailer and tradesperson may have very different bookkeeping requirements.
Sole traders should therefore configure their accounting software around the nature of their business and the applicable MTD rules rather than assuming that one bookkeeping structure works for everyone.
6. Sales Invoices and Supporting Documents
Digital transaction records do not necessarily replace the underlying evidence.
Sole traders should continue to retain original records or supporting documents used to prepare their tax returns, or appropriate copies.
These may include:
- Sales invoices
- Purchase invoices
- Receipts
- Bank statements
- Credit notes
- Supplier statements
- Payment processor reports
- Marketplace statements
- Mileage records
- Relevant contracts
- Other documents supporting business transactions
The digital accounting entry provides the structured financial record, while supporting documentation helps demonstrate the underlying transaction.
Keeping both creates a stronger audit trail.
7. Bank Statements and Bank Transactions
Bank records are an important part of accurate digital bookkeeping.
Many accounting systems can connect directly to business bank accounts and import transactions automatically. This can reduce manual data entry, but imported transactions still need to be reviewed.
A bank feed may show the amount and supplier but not necessarily contain all the information required for the MTD digital record.
For example, a bank statement might show a payment of £850 to a supplier. The business owner may still need to determine whether the payment relates to stock, equipment, professional services or another category.
Regular bank reconciliation can identify:
- Missing transactions
- Duplicate entries
- Incorrect amounts
- Unidentified payments
- Personal transactions
- Outstanding customer receipts
- Bank charges
- Refunds
A reliable reconciliation process is particularly useful before quarterly MTD updates are submitted.
8. Digital Records for E-Commerce Businesses
E-commerce sole traders often have more complicated transaction flows than traditional service businesses.
A typical transaction may move through several systems:
Customer → Website or Marketplace → Payment Processor → Business Bank Account
The final bank deposit may therefore represent multiple underlying transactions.
For example, an online retailer could generate £10,000 of customer sales during a month. The payment platform might deduct £250 in transaction fees and £300 in refunds before transferring £9,450 to the bank.
Recording only the £9,450 bank deposit as sales may not accurately represent the underlying transactions.
E-commerce records may therefore need to reconcile:
- Gross customer sales
- Refunds
- Marketplace commissions
- Payment processing fees
- Shipping charges
- Discounts
- Chargebacks
- Settlement payments
- Other platform deductions
AccountancyNet supports businesses using platforms such as Amazon, Shopify, eBay and Etsy, helping businesses maintain bookkeeping processes around their digital sales activity.
9. Business Travel and Mileage Records
Travel is another area where sole traders need clear records.
Where business travel or mileage is claimed, records should provide enough information to support the claim and establish the business purpose.
Depending on the method used, relevant information may include:
- Date of journey
- Business purpose
- Starting point
- Destination
- Mileage
- Travel costs
- Parking costs
- Other relevant expenses
The precise tax treatment depends on the circumstances and the method being used.
Recording journeys regularly is preferable to relying on memory at the end of the tax year. Digital mileage applications can also help where they integrate appropriately with accounting records.
10. Equipment and Asset Purchases
Equipment purchases should also be recorded accurately.
Examples include:
- Computers
- Tools
- Machinery
- Office equipment
- Business furniture
- Specialist equipment
A large purchase may not be treated in the same way as an ordinary day-to-day expense. Depending on the circumstances, capital allowances or other tax rules may apply.
The digital record should therefore identify the asset, its cost and the relevant transaction date. Supporting invoices should also be retained.
11. Refunds, Credits and Corrections
Digital records need to remain accurate when transactions change.
A customer may receive a refund, a supplier may issue a credit note or a payment may initially be entered incorrectly.
These situations should be corrected in the accounting system rather than ignored.
Where records are maintained across separate software products, the correction process should also preserve the required digital links.
Regular reviews help identify errors before they flow into quarterly updates.
12. Digital Links Between Software
Some sole traders may use more than one software product.
For example, an accounting system may hold the bookkeeping records while another system is used to submit information to HMRC.
Where multiple products are used to maintain and submit relevant records, the systems generally need to be digitally linked in accordance with HMRC requirements.
Digital links can include:
- Linked spreadsheet cells
- Compatible file transfers
- XML or CSV transfers
- Automated data transfers
- API connections
Manual copying and pasting should not be used as a substitute where digital linking is required.
When choosing accounting software, sole traders should therefore consider whether the system can create the necessary digital records and communicate appropriately with MTD submission software.
13. Do You Need to Digitise Every Personal Transaction?
No.
MTD for Income Tax focuses on relevant self-employment and property income and expenses.
Other sources of income reported through Self Assessment do not generally have to be maintained as MTD digital records in the same way. However, those sources may still need to be reported through the annual tax return.
MTD digital record keeping should therefore not be confused with maintaining a digital record of every transaction in an individual’s personal life.
14. How Long Must Sole Traders Keep Digital Records?
Sole traders generally need to retain their records for at least five years after the 31 January submission deadline for the relevant tax year.
Records that may need to be retained include:
- Digital accounting records
- Invoices
- Receipts
- Bank statements
- Supporting documents
- Transaction reports
- Other evidence used to prepare the tax return
Cloud accounting systems can make long-term storage easier, but the sole trader remains responsible for ensuring records are retained and accessible.
15. What Happens If Your Records Are Incomplete?
Incomplete records can result in incorrect quarterly updates and make year-end tax preparation more difficult.
Missing supporting documents can also make it harder to demonstrate why an expense was claimed.
A practical monthly process can include:
- Review all bank transactions.
- Match payments to invoices and receipts.
- Record cash transactions.
- Check sales against invoices or platform reports.
- Categorise expenses.
- Upload supporting documents.
- Reconcile bank and payment accounts.
- Investigate unusual transactions.
- Correct errors.
- Review the period before the quarterly submission.
Maintaining records continuously reduces the amount of work required immediately before an MTD deadline.
16. Digital Record Keeping for Multiple Sole Trader Businesses
Some individuals operate more than one sole trader business.
For example, an individual could operate a consultancy alongside a separate online retail business.
Where this applies, HMRC requires separate digital records and quarterly updates for each sole trader business.
Each business should therefore have a clear accounting structure so transactions can be attributed to the correct activity.
Separate records can also make it easier to analyse the performance of each business.
17. What If You Use the Trading Income Allowance?
The trading income allowance does not automatically remove all digital record-keeping responsibilities.
HMRC has specific rules for sole traders who use the trading income allowance. The correct treatment depends on the income involved and the taxpayer’s circumstances.
Sole traders using the allowance should therefore check the applicable MTD rules rather than assuming that the allowance removes their digital record-keeping responsibilities.
18. What About Disallowable Expenses?
Not every expense paid by a business is necessarily allowable for tax purposes.
Recording a transaction and claiming a tax deduction are separate issues.
A sole trader should not assume that an expense is allowable simply because it has been entered into accounting software.
At the same time, maintaining clear records of business transactions can help an accountant understand and reconcile the business’s overall financial activity.
19. Why Accurate Digital Records Matter
Digital record keeping is more than an administrative requirement. Accurate records give sole traders better visibility over:
- Sales
- Expenses
- Cash flow
- Outstanding payments
- Business profitability
- Tax liabilities
- Spending patterns
- Overall financial performance
Good bookkeeping can also help identify errors earlier and provide a clearer picture of the business throughout the year.
Instead of waiting until the Self Assessment deadline to discover unexpected expenses or insufficient funds for a tax payment, a sole trader can use up-to-date financial information to make better business decisions.
20. What Software Should Sole Traders Use?
Eligible sole traders need compatible software for MTD for Income Tax.
When choosing software, consider:
- MTD for Income Tax compatibility
- Bank-feed functionality
- Invoice creation
- Receipt capture
- Expense categorisation
- Digital document storage
- VAT functionality where applicable
- E-commerce integrations
- Multiple-business support
- Accountant access
- Data export
- MTD submission functionality
The cheapest software is not necessarily the most suitable.
A sole trader processing ten transactions a month may have very different requirements from an online retailer processing hundreds of orders through multiple platforms.
21. MTD Digital Records and Self Assessment
MTD does not remove the annual tax return.
Digital records maintained throughout the year support quarterly updates and the final tax reporting process. The annual process still needs to consider the full tax position, including relevant adjustments, reliefs and other taxable income.
Quarterly updates should therefore not be treated as a replacement for year-end tax preparation.
For help with annual tax reporting, AccountancyNet’s Self Assessment support can help sole traders manage their tax return and wider HMRC reporting requirements.
22. Common Digital Record-Keeping Mistakes
Recording only bank deposits
A bank deposit may represent several underlying transactions. This is particularly important for e-commerce businesses where payments can be reduced by fees, refunds and commissions.
Entering transactions only every few months
Delaying bookkeeping increases the risk of missing transactions and makes reconciliation more difficult.
Treating receipts as the accounting record
A receipt is supporting evidence. It does not necessarily contain all the structured information required for an MTD digital record.
Assuming bank feeds are completely automatic
Imported transactions still need to be reviewed and categorised.
Mixing business and personal spending
Mixed transactions make bookkeeping and tax treatment more difficult.
Using incompatible software
Software that supports MTD for VAT does not automatically mean that it supports MTD for Income Tax.
Copying information manually between systems
Where digital linking is required, manual copying and pasting may not satisfy the requirements.
Forgetting to correct errors
Incorrect transactions should be corrected rather than carried forward into subsequent reporting.
Deleting records after filing
Digital records and supporting evidence need to be retained for the required period.
23. A Practical MTD Record-Keeping System for Sole Traders
A straightforward process can make MTD easier to manage.
Step 1: Choose compatible software
Select software that supports MTD for Income Tax and suits the volume and complexity of your business.
Step 2: Connect relevant accounts
Where appropriate, connect business bank accounts and supported platforms to reduce manual data entry.
Step 3: Record income promptly
Enter sales, fees and other relevant business income as transactions occur.
Step 4: Record expenses
Enter business costs with the correct date, amount and category.
Step 5: Store supporting documents
Attach or securely store invoices, receipts and other evidence.
Step 6: Reconcile regularly
Compare accounting records with bank statements and third-party reports.
Step 7: Correct errors
Resolve missing, duplicated or incorrectly categorised transactions as soon as possible.
Step 8: Review before quarterly submission
Check the relevant period carefully before submitting the quarterly update.
Step 9: Keep records after year-end
Retain digital records and supporting documentation for the required period.
Step 10: Prepare for the annual return
Use the year’s records to support the final tax return and tax calculation.
How AccountancyNet Can Help With MTD Record Keeping
For many sole traders, the main challenge with MTD is not understanding that records must be digital. It is maintaining accurate records consistently while running the business.
AccountancyNet Ltd provides accounting and bookkeeping services for businesses across England and Wales, including support with Self Assessment, bookkeeping, VAT and MTD-related compliance.
Professional support can be particularly useful if:
- You have multiple income sources.
- You operate more than one sole trader business.
- You sell through e-commerce platforms.
- You are approaching the MTD threshold.
- You are unsure which software to use.
- Your bookkeeping is currently spreadsheet-based.
- Your records contain personal and business transactions.
- You have VAT obligations alongside MTD.
- You need help reconciling bank and payment-platform transactions.
- You want an accountant to manage quarterly submissions.
You can also explore AccountancyNet’s bookkeeping service for help establishing structured financial records and maintaining bookkeeping processes throughout the year.
Frequently Asked Questions
Do sole traders have to keep all records digitally under MTD?
Eligible sole traders must create and store digital records of relevant self-employment income and expenses. Supporting documents such as invoices and bank statements must also be retained where they are needed to support the tax return.
What information must each MTD digital record contain?
The core information includes the amount, date and relevant category of the income or expense.
Do I need to keep paper receipts?
MTD requires digital records, but supporting documents can exist in paper form or as digital copies. The important point is that appropriate supporting evidence used to prepare the tax return is retained.
How long must MTD records be kept?
Digital records generally need to be retained for at least five years after the 31 January submission deadline for the relevant tax year.
Can I use Excel for MTD?
Spreadsheets can form part of an MTD-compliant system in certain circumstances. However, where multiple software products are used, the required digital links must be maintained. Manual copying and pasting is not an acceptable replacement where digital linking is required.
Do quarterly updates replace Self Assessment?
No. Quarterly updates provide summaries of business income and expenses. The annual tax return remains part of the process.
What happens if I make a mistake?
The digital record should be corrected in accordance with HMRC’s correction rules so that the relevant figures can be reported accurately.
Do I need separate records for different sole trader businesses?
Yes. HMRC requires separate digital records and quarterly updates for each sole trader business.
Does MTD apply to every sole trader?
No. The requirements depend on qualifying income and the relevant tax year. From April 2026, the first mandatory group has qualifying income above £50,000, with the threshold scheduled to reduce in later phases.
Final Thoughts
The central requirement under MTD for Income Tax is straightforward: eligible sole traders must maintain reliable digital records of relevant business income and expenses and use compatible software to support quarterly reporting.
Records should contain the required transaction information, including amounts, dates and categories, and should be supported by appropriate invoices, receipts, bank statements and other evidence.
Transactions should be reconciled regularly, errors corrected promptly and records retained for the required period.
MTD works best when bookkeeping becomes a routine business process rather than a task completed immediately before a tax deadline.
For sole traders with multiple platforms, several income sources or more complex expenses, professional bookkeeping and tax support can help reduce the risk of inaccurate reporting.
For the latest official requirements, sole traders should review the GOV.UK guidance on creating digital records for MTD for Income Tax.
AccountancyNet Ltd supports businesses across England and Wales with bookkeeping, Self Assessment, VAT and wider accounting compliance.