Just days before a major change in how taxes are filed, new figures show that three out of every four sole traders and landlords in the UK are not ready for the new digital tax system.
The new rules, called Making Tax Digital for Income Tax, started on April 6, 2026. But with the first quarterly deadline now only months away, most of the 864,000 people who must use the new system have not yet signed up .
This is one of the biggest changes to the UK tax system in a generation. Yet many small business owners and landlords say they do not understand what they need to do.
Only One in Four Have Registered
According to recent figures, only about 81,000 of the 864,000 taxpayers who must join the first wave have registered with HMRC. This means that roughly 90% have not yet taken the first step .
A survey by the software company Xero found that 41% of small businesses, sole traders, and landlords are not ready to comply with the new rules. One in seven (14%) have taken no action at all .
The problem is even worse among those who do not use an accountant. HMRC statistics show that while 78% of those with an agent and high income use commercial software, only 21% of those without an agent do the same .
What Is Making Tax Digital?
Making Tax Digital (MTD) for Income Tax changes how sole traders and landlords report their earnings to HMRC. Instead of filing one tax return each year, affected people must now :
- Keep digital records of all income and expenses
- Send quarterly updates to HMRC (four times per year)
- Complete a final declaration each January
The first quarterly update for those in the April 2026 wave is due by August 7, 2026 .
Who Is Affected and When?
The new rules are being introduced in stages based on how much someone earns :
| Start Date | Income Threshold | Number Affected |
|---|---|---|
| April 2026 | Over £50,000 | 864,000 people |
| April 2027 | Over £30,000 | 1,077,000 people |
| April 2028 | Over £20,000 | 975,000 people |
In total, about 2.9 million sole traders and landlords will need to join the system by 2028. This represents 42% of all 7 million people who currently file self-assessment tax returns .
Why Are So Many People Unprepared?
There are several reasons why so many sole traders and landlords are not ready for the digital tax launch.
Lack of Awareness
Many people simply do not know the change is coming. A survey by IPSE, which represents self-employed workers, found that only 30% of sole traders have a clear understanding of what MTD involves. Almost 40% were not aware of the change at all .
Confusion About the Rules
Even among those who know about MTD, confusion is widespread. Research shows that 81% of affected taxpayers feel they need more clarity on key areas of compliance .
Common areas of confusion include :
- Understanding the difference between quarterly submissions and the final declaration (43%)
- How fines and penalties will be applied (41%)
- Whether thresholds are based on profit or total income (31%)
Reliance on Old Methods
Most sole traders still manage their finances in ways that will not meet the new digital requirements :
- One-third still use pen and paper for their books
- Two-thirds rely on spreadsheets
- More than half track income through bank statements
- Only one in ten have adopted cloud-based accounting software
HMRC’s Communication Problem
Many taxpayers feel HMRC has not done enough to inform them. Nearly three-quarters (74%) of sole traders said they would welcome more support and guidance from HMRC .
HMRC has started sending warning letters, but these are being sent in batches. Those who filed their tax returns close to the deadline may not receive their letters until the end of March or early April .
What Happens If You Do Not Comply?
The good news is that HMRC has announced a “soft landing” period. For the first 12 months, taxpayers will not receive penalty points for late quarterly submissions .
However, this does not mean people are off the hook. The full penalty system will begin from April 2027. Those who ignore their obligations could face :
- Failure to file penalties
- Point-based penalties for late submissions (a £200 penalty once four points are reached)
- Late payment penalties
- Interest charges
- Increased HMRC scrutiny
Filing more than 15 days late could trigger fines of 3% to 10% of the tax due, plus interest .
The Accountant Problem
It is not just sole traders and landlords who are unprepared. Accountants are also behind schedule.
A poll by IRIS found that only 3% of accountants have completed preparations for their clients. Nearly 30% of accountants have not begun at all. Yet 79% of accountants say MTD is their biggest compliance challenge .
This is a serious problem because 75% of those with income over £50,000 use an authorised agent. If accountants are not ready, their clients cannot be ready either .
Digital Exclusion: Who Can Get an Exemption?
Not everyone has to use the digital system. Some people can apply for an exemption if they are “digitally excluded.”
According to HMRC, a taxpayer is digitally excluded only if it is “not reasonable” for them to use MTD-compatible software. Reasons can include :
- Age
- Health conditions or disability
- Religion
- Lack of internet access at home or work because of their location
Exemptions are not automatic. People must apply for them, and HMRC will decide case by case.
Free Software Options Are Available
One major concern for many sole traders is the cost of new software. However, HMRC says free software options are available .
Some providers are stepping in to help. For example, Monzo Business has launched a free built-in tax tool powered by Sage’s accounting technology, designed specifically to help sole traders navigate the transition without additional financial burden .
Once income and expenses are recorded in approved software, the software automatically generates a simple summary to send to HMRC. This means no more last-minute hunting for receipts in January .
The Benefits of Going Digital
Despite the challenges, many small business owners see the long-term benefits of a digital-first approach. Research shows that around three-quarters believe MTD will help them :
- Reduce end-of-year “tax surprises” by giving better visibility of their tax position (76%)
- Provide peace of mind over their tax obligations (73%)
- Nudge them toward adopting digital processes (74%)
- Save time compared to completing an annual self-assessment (72%)
Sole traders currently spend an average of 27 hours every year – more than three full working days – doing their taxes. Using digital tools could give them back that time .
What Sole Traders and Landlords Need to Do Now
If you are a sole trader or landlord earning more than £50,000, here are the steps you need to take immediately :
- Choose HMRC-recognised software – Free options are available
- Sign up for MTD with HMRC – Do this through the software or directly on GOV.UK
- Start keeping digital records – Use the software to track income and expenses
- Prepare for the first quarterly update – Due by August 7, 2026
- Speak to your accountant – If you have one, make sure they are ready
The first MTD tax return, covering the 2026 to 2027 tax year, will be due by January 31, 2028 .
The Bottom Line
The launch of Making Tax Digital for Income Tax represents the most significant shift in self-employment taxation in a generation . Yet with the first quarterly deadline approaching, the majority of affected sole traders and landlords are not ready.
The soft landing period gives some breathing room, but it is not an excuse to do nothing. Those who delay risk being caught out when the full penalty system begins in April 2027.
For now, the message from HMRC and industry experts is clear: act now. Choose your software, sign up, and start keeping digital records. The time to prepare is running out.