Fast-track guide for sole traders for filing Making Tax Digital (MTD) for Income Tax quarterly updates
This article describes how sole traders can get up and running and ready to make submissions for Making Tax Digital (MTD) for Income Tax using FreeAgent.
If you’re a landlord, read our fast-track guide for landlords for MTD for Income Tax. If you’re a sole trader and a landlord, you'll need separate sole trader and unincorporated landlord accounts in FreeAgent. Read how to use FreeAgent for Making Tax Digital (MTD) for Income Tax for multiple businesses.
From 6th April 2026, MTD for Income Tax will become mandatory in phases based on your total annual income from self-employment and/or property, beginning with those whose total income from their business and/or property is above £50,000 per year - you can find out more on our MTD for Income Tax page.
HMRC requires anyone registered for MTD for Income Tax to keep digital records and send quarterly updates about their business and/or property income and expenses to HMRC. They will also have to submit an end-of-year statement and final declaration after the end of the tax year.
FreeAgent’s powerful automation features can help you manage your finances with confidence and get your accounts in order for digital filing with minimal hassle. Follow the steps below to get you set up and ready to file MTD for Income Tax quarterly updates.
- Set up your FreeAgent account
- Connect FreeAgent to HMRC
- Import your bank transactions
- Explain your business-related bank transactions
- Add out-of-pocket expenses
- Add invoices and bills (optional)
- Send quarterly updates to HMRC
1. Set up your FreeAgent account
First, sign up for FreeAgent and follow the steps to set up your account(s). If you’re a sole trader and a landlord, you'll need separate sole trader and unincorporated landlord accounts in FreeAgent.
If you’ve already set up your account(s), you can skip to the next step, connecting FreeAgent to HMRC.
If you’re bringing your accounting data to FreeAgent from another accounting software or from manual record-keeping such as spreadsheets, read our guidance on how to switch to FreeAgent.
If you have a business banking account with either NatWest, Royal Bank of Scotland, Ulster Bank or Mettle, you have the option to use FreeAgent for free for as long as you retain your bank account (optional add-ons may be chargeable). Find out how to set up a Mettle-funded FreeAgent account or transfer to a funded account.
2. Connect FreeAgent to HMRC
Once you’ve set up your FreeAgent account, you can connect FreeAgent to HMRC for MTD for Income Tax. This lets FreeAgent know that you’re signed up to MTD for Income Tax and will enable the MTD for Income Tax functionality within your FreeAgent account.
If you need to sign up multiple sole trader businesses for MTD for Income Tax, we'd recommend ensuring that each business has a different and recognisable trading name so you can tell them apart when connecting FreeAgent to HMRC. You can update your business trading names with HMRC if needed.
HMRC requires you to update your MTD connection every 18 months. FreeAgent will display an ‘Expiring soon’ warning in the 'HMRC Connection' box on the right-hand side of your MTD for Income Tax returns 10 days before the connection is due to expire.
3. Import your bank transactions
Banking is one of the most important features in FreeAgent. Connecting your bank account allows your bank transactions to be automatically imported into FreeAgent. Rest assured your data is safe and secure.
You can import your bank transactions into FreeAgent automatically by connecting your bank account and enabling a bank feed. If your bank account is with a challenger bank such as Monzo, Starling Bank, Revolut or Capital on Tap, then you can set up an integration, which will function in a similar way to a bank feed.
If a bank feed isn't available for your bank, or you need to import historical transactions that are outside the scope of your bank feed, you’ll need to either upload bank statements or enter transactions manually.
4. Explain your business-related bank transactions
After your bank transactions have been imported or uploaded, you'll be able to view them in the Banking area of FreeAgent, where you can explain them to tell FreeAgent what each transaction relates to.
If you're below the VAT threshold and not VAT-registered, you can leave the VAT rate as 'Auto' when explaining bank transactions or change it to 'Out of Scope'. If you leave the VAT rate as 'Auto' and then register for VAT in the future, FreeAgent will automatically reclaim the VAT on these purchases on your first VAT return if required.
The software adds up the numbers for your business’s accounts based on the explanations you give for the money paid into and out of your business bank accounts.
FreeAgent’s Guess feature is powered by AI to help you nail the daily admin by automatically categorising new bank transactions based on existing information in your FreeAgent account.
Guess is enabled by default for Open Banking bank feeds, but you'll need to enable it manually for challenger bank feed integrations.
If you have a personal bank account, you only have to explain the transactions that relate to your business.
5. Add out-of-pocket expenses
If you spend money on your business using personal funds, you would enter these costs as out-of-pocket expenses.
You can either upload a receipt using Smart Capture to auto-fill some of the details, or manually enter all of the remaining details of the out-of-pocket expense. You can also record your out-of-pocket expenses on the go using the FreeAgent mobile app.
If the business then reimburses you for costs that you paid for personally, find out how to explain an expense repayment.
6. Add invoices and bills (optional)
If you’re using cash basis accounting, you can skip to the next step, sending quarterly updates to HMRC.
If you’re using accruals basis accounting, you can either create sales invoices to record your income, or, if you're paid immediately in full, explain the bank transactions as ‘Sales’.
You can also add bills to record any invoices that you’ve received from your suppliers.
7. Send quarterly updates to HMRC
When the connection is completed successfully, you’ll be able to send quarterly updates to HMRC via MTD for Income Tax using FreeAgent.
Useful resources
You might find the following articles useful on MTD for Income Tax: