For sole traders

This guide covers the sole-trader-specific parts of MTD. If you're also a landlord, read For landlords as well, you'll be doing both.

What "sole trader" means here

For MTD, you're a sole trader if you run an unincorporated business on your own and report the profits on your Self Assessment (and in future your final declaration). Includes freelancers, contractors, tradespeople, consultants, online sellers, creative professionals, and so on.

Partnerships are not sole traders. If you're a partner in a partnership, your partnership share doesn't go through MTD (yet), it's still reported separately. Only your personal sole-trade or property income counts as qualifying income.

Limited companies are not sole traders. Directors of their own limited companies file a CT600 company return; MTD for Income Tax doesn't touch that.

Multiple sole-trade businesses

If you run more than one sole-trade business (say, you're a driving instructor and do some freelance graphic design on the side), MTD treats each as a separate business:

• Separate set of quarterly updates, one per business.
• Separate expense categories and income totals.
• Combined into your overall final declaration.

So a sole trader with two businesses is doing 8 quarterly updates a year (4 + 4), not 4. In practice your software submits them together at each deadline.

Sole-trader turnover thresholds that matter

£1,000, the trading allowance

If your gross sole-trade income is under £1,000 in a year, you usually don't need to report it at all, the trading allowance covers you. If you're around the threshold and have expenses lower than £1,000, claiming the allowance instead of actual expenses can be more generous.

£20,000 – £50,000, the MTD thresholds

As covered in Am I affected?, these are the qualifying-income thresholds for phased MTD entry:

Remember these are based on two tax years earlier: the April 2026 threshold tests your 2024-25 return.

£90,000, consolidated expenses

If your annual turnover is under £90,000, you can report your expenses as one total in each quarterly update, you don't have to categorise. Above £90k, you must provide a categorised breakdown.

£90,000, VAT registration

Coincidence alert: the VAT registration threshold is also £90,000. The two thresholds moved together in April 2024. If your turnover is close to £90k, you may be hitting both MTD categorisation and VAT registration at the same time, plan for both.

Sole-trader expense categories (over £90k)

Once you're above £90k, you categorise into HMRC's self-employment expense categories:

• Cost of goods sold, raw materials, resale stock.
• Subcontractor payments, CIS payments if you're in construction.
• Wages and staff costs, salaries, pensions, employer NI.
• Vehicle and travel, motor, van, mileage, fares.
• Premises running costs, rent, rates, insurance, utilities.
• Maintenance and repairs.
• Administrative costs, office supplies, subscriptions, software.
• Business entertainment, non-deductible, but reportable.
• Advertising and marketing.
• Interest on bank and other loans.
• Finance charges, bank charges, HP charges.
• Bad debts, irrecoverable debts written off.
• Professional fees, legal, accounting, consultancy.
• Depreciation, non-deductible for tax, but reportable.
• Other expenses.

Good accounting software handles the mapping automatically based on how you tag transactions. You don't have to memorise the list.

Simplified expenses

HMRC lets you use simplified expenses for some things instead of claiming actual costs:

• Vehicles: flat rate per mile (45p for the first 10,000 business miles, 25p thereafter) instead of actual running costs.
• Working from home: flat rate per month based on hours worked from home.
• Living on business premises: flat rate for personal use of costs.

Simplified expenses don't change MTD's mechanics, they just change how you calculate the numbers you feed in. You can mix and match (e.g. simplified for mileage but actual for everything else).

Capital allowances

Money spent on capital assets (equipment, vans, machinery, IT hardware that's expected to last more than a year or two) usually doesn't go through the ordinary expenses line. Instead you claim capital allowances against your profits.

Most sole traders use the Annual Investment Allowance (AIA), which lets you deduct 100% of most qualifying capital spending in the year you spend it, up to a limit (currently £1m/year). For most sole traders, the AIA means capital assets end up being fully deductible in the year of purchase, but the mechanic is different from an ordinary expense.

National Insurance

As a sole trader you generally pay:

• Class 2 NI, a flat weekly amount. Treated as paid when your profits are at or above the small profits threshold. Can be paid voluntarily below that to protect your State Pension. £3.50/week in 2025-26 and £3.65/week in 2026-27.
• Class 4 NI, percentage of profits above the Class 4 threshold (£12,570 in 2026-27). Calculated as part of your final declaration.

Both are paid alongside income tax on 31 January. No separate bill.

Losses

If you make a loss in the year, your software reports the loss figure in the same places as profit would be. At year-end, losses can typically be:

• Carried forward against future profits from the same trade.
• Set against other income of the same year (subject to rules).
• Set against prior year income (within limits).

Loss relief decisions are tax-planning decisions, your accountant is well worth having if you're in a loss position and want to use it wisely.

Student loans

If you're on a student loan repayment plan and your income is above the plan's threshold, your software calculates the student-loan repayment due at final declaration time. It's paid alongside everything else on 31 January. Plans have different thresholds and rates; your software handles the specifics based on which plan you're on.

Your software checklist as a sole trader

• Bank feed for your business bank account.
• Mileage tracking, if you drive for work.
• Receipt capture on mobile.
• Category mapping to HMRC's self-employment categories (useful proactively, essential over £90k).
• Capital-allowance handling at year-end.
• Student loan + NI calculations baked into the final-declaration flow.
• An in-year tax estimate so you can set money aside properly.

Kite covers all of these.

In practice

If you're doing your first-ever MTD year (2026-27), use the generosity of the quarterly-update easement as intended: practise. File each update on time if you can, but know that a late Q1 won't cost you money. What it will cost you is time later if you haven't kept the records up to date, so build the weekly reconciliation habit from day one.

Sources

• Use Making Tax Digital for Income Tax (GOV.UK)
• Expenses if you're self-employed (GOV.UK)
• Simplified expenses if you're self-employed (GOV.UK)
• Self-employed National Insurance rates (GOV.UK)
• Capital allowances: overview (GOV.UK)