With the first Making Tax Digital (MTD) for Income Tax quarterly update deadline on 7 August 2026 approaching, experts at Capital on Tap are encouraging sole traders to start preparing now so they have plenty of time to adapt to the new requirements.

A few weeks remain until the first Making Tax Digital (MTD) for Income Tax submission deadline, new research from Lloyds suggests more than half of small businesses (55%) still have work to do before they are ready to comply with the new rules.

Making Tax Digital is designed to modernise the UK’s tax system and encourage better digital record-keeping, but many self-employed workers are still getting to grips with what the changes mean in practice. From choosing compatible software to understanding new reporting requirements, there are several new considerations that businesses should be aware of.

Rebecca Alford, Chief Financial Officer (CFO), at Capital on Tap, comments:

1. Give yourself time to choose the right software: “One of the biggest challenges with Making Tax Digital isn’t necessarily submitting your quarterly updates, it’s deciding how your business will comply in the first place. With almost 90 HMRC-recognised software providers available, many sole traders may feel unsure about where to begin.

Businesses that have successfully managed their finances using spreadsheets or paper records for years are now faced with comparing dozens of software packages, each offering different pricing, features and subscription models. Starting your research early allows you to compare your options carefully and choose software that genuinely suits the way your business operates.”

2. Consider value, not just cost: “Cost will naturally be an important consideration for many small businesses, but it shouldn’t be the only factor. While some free or lower-cost software options provide the minimum functionality to meet HMRC’s requirements, others offer additional features such as cloud backups, bank integrations, invoicing tools, customer support and enhanced security. Choosing software that fits both your budget and your business needs can save time, improve efficiency and make managing your finances much easier over the long term.”

3. Preparing early can make the transition smoother: “The first quarterly reporting deadline marks an important milestone in the rollout of Making Tax Digital. Although this is the beginning of a new reporting process, businesses that prepare early will have more time to become familiar with their software and establish good digital record-keeping habits. For those moving away from manual records for the first time, giving yourself time to learn the system can make the transition much more manageable and help identify any issues before reporting becomes routine.”

4. There may be some upfront costs, but there can also be long-term benefits: “For some businesses, Making Tax Digital may introduce new ongoing costs, whether through accounting software subscriptions or professional support. For sole traders managing tight budgets, these additional expenses are understandably something to consider. However, good accounting software can also automate routine tasks, improve financial visibility and reduce time spent on administration, helping many businesses become more efficient over time.”

5. Quarterly reporting may take some getting used to: “For many sole traders, moving from an annual tax return to quarterly updates will represent a significant change in the way they manage their records. Although it may initially feel like more administration, keeping financial records up to date throughout the year can help businesses stay organised and avoid the end-of-year rush. The key is building simple habits early so quarterly reporting becomes part of the normal running of the business rather than an additional burden.”

6. A “no penalty” first year doesn’t mean a no-risk one: “HMRC has confirmed there won’t be penalty points for late quarterly updates during the first year, but that’s easily misread as blanket protection. It isn’t. If a payment itself is late, the usual penalty structure still applies in full: 3% of the tax owed at day 15, a further 3% at day 30, and then 10% a year charged daily on the outstanding balance for up to two years. Sole traders should treat the softer landing on updates as breathing room to get organised, not as a reason to relax about deadlines altogether.”

7. Making Tax Digital is an ongoing process, not a one-off task: “Preparing for the first quarterly update is only the beginning. Businesses will need to keep their digital records up to date throughout the tax year, rather than viewing the August deadline as a one-off exercise. Building good habits early can make future submissions much simpler and reduce the amount of time spent catching up on bookkeeping later in the year.”

Rebecca concludes: “Making Tax Digital represents one of the biggest changes to the way many sole traders manage their tax affairs in recent years. While around 375,000 businesses have already signed up, many more are still preparing for the transition and getting to grips with what the new requirements mean for them.

Adapting to a new system may seem daunting at first, but giving yourself enough time to understand the requirements, choose the right software and establish good digital record-keeping habits can make the transition much smoother.

For most businesses, the first quarterly update is about building confidence with the new process rather than achieving perfection. While HMRC is taking a supportive approach during the initial rollout and no penalty points will be issued for late quarterly updates during the first year, starting preparations early gives sole traders the best opportunity to become familiar with the system, establish good habits and make the transition as smooth as possible.”

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