Prepare for Making Tax Digital for Income Tax in FreeAgent

This article provides an overview of Making Tax Digital (MTD) for Income Tax and offers guidance on how to get ready for it using FreeAgent.

Signing up for MTD for Income Tax is currently voluntary, and will help us and HMRC test and develop the service ahead of its launch. From 6th April 2026, it will become mandatory in phases based on your total annual income from self-employment or property, beginning with those whose total income from their business/property is above £50,000 per year.

HMRC has published detailed guidance for sole traders, landlords, and accountants who want to volunteer to use and test MTD for Income Tax for the 2024/25 and 2025/26 tax years. After you’ve signed up to test MTD for Income Tax, you’ll get access to a dedicated support team at HMRC. You’ll also be able to review and update your details through HMRC Online Services.

An introduction to MTD for Income Tax

MTD is a government initiative aiming to digitise the UK tax system.

MTD for Income Tax will apply from 6th April 2026 for unincorporated businesses and landlords with qualifying income from their business/property above £50,000 per year. 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 a final declaration after the end of the tax year.

Some businesses and landlords can choose to sign up voluntarily before the 2026/27 tax year, allowing them to get familiar with the process and benefit from digital record-keeping in advance.

Partnerships will be required to join at a future date, yet to be announced.

For more details about how MTD for Income Tax will work, please see the government’s policy paper, Making Tax Digital for Income Tax Self Assessment for sole traders and landlords.

Preparing your accounts in FreeAgent

Before you send quarterly updates to HMRC using FreeAgent, there are a number of things you’ll need to check to ensure that FreeAgent creates an accurate quarterly report for your business.

1. Check your accounting dates

Make sure that your FreeAgent start date is correct, which is the date from which you started keeping your books in FreeAgent. Find out more about the FreeAgent start date for new businesses and existing businesses.

To view or change your FreeAgent start date, select ‘Settings’ from the drop-down menu at the top-right of the screen and then select ‘Accounting Dates’ in the ‘Accounting, Tax & VAT’ section.

2. Ensure that all your transactions are recorded correctly in FreeAgent

In order to create accurate quarterly reports, FreeAgent needs to have all the details of your bank transactions, invoices, bills and out-of-pocket expenses.

Bank transactions

We recommend that you import your bank transactions into FreeAgent automatically by enabling 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 will need to either upload bank statements or enter transactions manually. If you have a bank feed enabled to import transactions automatically, be careful not to duplicate any of these transactions with a manual import as this will cause transactions to be recorded twice.

After your bank transactions have been imported or uploaded, you will need to explain them. Once you’ve started explaining transactions, FreeAgent’s Guess feature will attempt to explain your transactions automatically. Find out more about how to manage Guess.

Income

To record your income, you can create invoices or explain the money you receive into your bank account as ‘Type - Sales’ if you’re not sending invoices. If you receive cash payments, find out how to record cash transactions in FreeAgent.

FreeAgent will automatically populate your total income for the quarter in the ‘Income’ section of your MTD submission.

Costs

To record your costs, you can create supplier bills, add out-of-pocket expenses or explain the money out of your bank account as ‘Type - Payment’ and select the relevant cost category. Before entering this data, it’s a good idea to familiarise yourself with the difference between an expense, a bill and a bank payment in FreeAgent.

FreeAgent will automatically populate your total costs for the quarter in the ‘Expenses’ section of your MTD submission.

Other important things to remember

By enabling bank feeds and regularly explaining your imported bank transactions, your bank balance in FreeAgent should match the balance in your online bank account. If the figures don't match, follow our guidance for addressing discrepancies before you make any submissions through MTD.

If any of your transactions have been explained incorrectly, you’ll need to either edit or remove the bank transaction explanations. If you need to create a credit note, make sure that you correctly net it off with the invoice.

How to send quarterly updates to HMRC via MTD for Income Tax

Once you’ve completed the steps above, you’ll be ready to connect FreeAgent to HMRC for MTD for Income Tax and send quarterly updates to HMRC using FreeAgent.

Additional resources

You might find the following articles useful on MTD for Income Tax:

• Update your Making Tax Digital for Income Tax settings
• Switch to calendar quarterly update periods for Making Tax Digital for Income Tax
• Enter adjustments and allowances for Making Tax Digital for Income Tax
• Making Tax Digital for Income Tax adjustments and allowances
• Enter Individual Information for Making Tax Digital for Income Tax
• Viewing a breakdown of a tax estimate