Making Tax Digital for freelancers: what you need to know
MTD for Income Tax Self Assessment becomes mandatory from April 2026. Here is what it means for UK freelancers and sole traders, what you need to do, and how it fits alongside your invoicing workflow.
What is Making Tax Digital for Income Tax?
Making Tax Digital for Income Tax Self Assessment (MTD ITSA) is an HMRC programme that requires sole traders and landlords to keep digital records of their income and expenses and submit quarterly summaries to HMRC using compatible software. It replaces the traditional approach of filing a single annual Self Assessment tax return with a more frequent, digital-first process.
The idea behind MTD is straightforward: if your records are digital and you report to HMRC more regularly, there should be fewer errors, fewer surprises at year-end, and a clearer picture of what you owe throughout the year. Whether you agree with that reasoning or not, it is now the law for those above certain income thresholds, and it is coming for more people over the next few years.
MTD has already been in place for VAT-registered businesses since April 2019. MTD ITSA is the next phase, extending the same digital record-keeping and reporting requirements to income tax.
Who it affects
MTD ITSA applies to individuals who receive income from self-employment or property (or both) and who file a Self Assessment tax return. In practice, this means:
Sole traders: If you are a freelancer, contractor, or self-employed person operating as a sole trader, MTD ITSA applies to you once your qualifying income exceeds the relevant threshold.
Landlords: If you receive rental income from UK or overseas property, you are also covered.
People with both: If you have both self-employment and property income, your combined gross income is what determines whether you meet the threshold.
MTD ITSA does not currently apply to partnerships, though the government has said it intends to bring them in at a later date. It also does not apply to limited companies or to individuals whose only income is from PAYE employment.
Important
The income thresholds are based on gross income (your total turnover), not profit. If you invoice £52,000 a year but your expenses bring your profit down to £38,000, you are still in the £50,000+ bracket.
Timeline: when does it start?
MTD ITSA has been delayed several times since it was first announced. The current confirmed dates are:
If you are above the £50,000 threshold, the April 2026 deadline is now here. If you have not already set up your MTD-compatible software and signed up with HMRC, you should do so as soon as possible. If you are in the £30,000 to £50,000 bracket, you have until April 2027, but there is no harm in getting set up early.
What you need to do
If you fall within the MTD ITSA thresholds, there are four core obligations you need to meet.
1. Keep digital records
You must maintain digital records of all your business income and expenses using MTD-compatible software. “Digital” means stored in software that can connect to HMRC, not just typed into a Word document or a paper ledger. Your records need to include the date, amount, and category of each transaction.
2. Submit quarterly updates
Four times a year, you must submit a summary of your income and expenses to HMRC through your MTD-compatible software. These are not full tax returns. They are high-level summaries covering each quarter of the tax year (April to July, July to October, October to January, January to April). The deadlines for each quarterly update are typically one month and seven days after the quarter ends.
3. Submit an end-of-period statement
After the end of the tax year, you submit an end-of-period statement (EOPS) for each source of income. This is where you make any accounting adjustments, such as capital allowances, and finalise the figures for the year.
4. Submit a final declaration
The final declaration replaces the traditional Self Assessment tax return. It brings together all your income sources (including any PAYE employment income), confirms the figures are correct, and calculates the tax you owe. The deadline for the final declaration is 31 January following the end of the tax year, the same deadline that currently applies to Self Assessment.
In plain English
Instead of ignoring your books all year and then scrambling to file your tax return in January, you are now expected to keep your records up to date and send HMRC a summary every three months. It is more admin, but if you are already using accounting software and keeping on top of your finances, the extra work is manageable.
What counts as compatible software
To be MTD-compatible, software must be able to connect to HMRC’s systems via their API, store your digital records in the required format, and submit your quarterly updates, end-of-period statement, and final declaration electronically. You cannot submit these through the HMRC website manually. The software has to do it for you via the API connection.
HMRC maintains a list of MTD-compatible software on GOV.UK. The most widely used options for freelancers and sole traders in the UK include:
Xero: Cloud-based accounting software, popular with freelancers and small businesses. MTD-compatible for both VAT and Income Tax.
FreeAgent: Designed specifically for freelancers, sole traders, and micro-businesses. MTD-compatible and widely used in the UK.
QuickBooks: Cloud-based accounting with MTD support. Offers a self-employed tier aimed at sole traders.
Sage: Established accounting software with MTD-compatible products for small businesses.
Bridging software: If you prefer to keep your records in spreadsheets, some providers offer bridging software that connects your spreadsheet to HMRC’s API. This is a valid option, though it adds an extra step to the process.
Whichever tool you choose, make sure it is on HMRC’s approved list and that it supports MTD for Income Tax specifically (not just MTD for VAT, which is a separate programme with different requirements).
How MTD affects your invoicing
MTD does not change how you write or send invoices. There is no new invoicing format required, and HMRC is not asking to see individual invoices as part of your quarterly updates. What MTD does require is that the income from those invoices is recorded digitally in compatible software and included in your quarterly summaries.
In practical terms, this means your invoicing records need to feed into your accounting software. If you raise an invoice for £2,000 in May, that £2,000 needs to appear in your digital records for the April-to-July quarter. How it gets there depends on your setup: you might enter it manually, import it from a CSV, or have it sync automatically if your invoicing tool integrates with your accounting software.
The key point is that your invoicing and your bookkeeping cannot be completely separate worlds any more. They need to be connected, even if that connection is as simple as you entering your invoice totals into your accounting software each month.
Tip
If you are not already recording your invoices in accounting software, start now. Even if MTD does not apply to you yet, building the habit of keeping your records up to date will make the transition much smoother when it does.
Where PennyFetch fits in (and where it does not)
Let us be upfront about this: PennyFetch is not MTD-compatible accounting software. It does not connect to HMRC, it does not submit quarterly updates, and it is not designed for bookkeeping or tax compliance. If you need MTD-compatible software, you need Xero, FreeAgent, QuickBooks, or one of the other tools listed on HMRC’s approved list.
What PennyFetch does is help you get paid. It tracks your invoices, sends automated payment reminders, and gives you visibility over who owes you money and how long they have owed it. It helps you chase late payments so you are not leaving money on the table.
These are different problems. Your accounting software handles the tax side: recording transactions, categorising expenses, and reporting to HMRC. PennyFetch handles the cash flow side: making sure clients actually pay what they owe, on time. The two work alongside each other.
A typical freelancer setup might look like this
Accounting software (e.g. FreeAgent, Xero): Record income and expenses, reconcile bank transactions, submit quarterly updates and final declaration to HMRC.
PennyFetch: Track which invoices are outstanding, send automated reminders, escalate overdue invoices, and monitor client payment behaviour.
You create your invoice in your accounting software (or however you usually create invoices), send it to your client, and then add it to PennyFetch so it can chase payment for you. When the client pays, you mark it as paid in both systems.
Frequently asked questions
Related guides
This guide is for informational purposes only and does not constitute tax or legal advice. MTD requirements and deadlines may change. For the latest position, check GOV.UK or consult your accountant.
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