Making Tax Digital for Income Tax started on 6 April 2026, and it’s caused a fair amount of confusion among small business owners about whether it changes anything about how they run payroll. The short answer is that MTD for Income Tax is about Self Assessment, not PAYE. If you employ people, your payroll obligations — RTI, PAYE, auto-enrolment — sit in a completely separate system and haven’t changed because of MTD at all. Where it genuinely gets relevant is if you’re a sole trader who also has employees, because you’re managing both systems simultaneously, even though they don’t actually overlap.
What is MTD for Income Tax
It replaces the traditional annual Self Assessment return with digital record-keeping and quarterly updates sent to HMRC throughout the year, feeding eventually into an annual final declaration. The rollout is phased by income level.
From 6 April 2026, it’s mandatory for sole traders and landlords with qualifying income over £50,000. From 6 April 2027, that drops to £30,000. From 6 April 2028, it drops again to £20,000. Qualifying income here means gross income from self-employment and rental property combined, before expenses — not your profit, and not income from PAYE employment, dividends, or pensions, none of which count toward the threshold.
If you’re in the first wave, you’ll send quarterly digital updates to HMRC covering income and expenses rather than waiting for the end of the tax year to report everything in one go. You still pay your tax bill by the usual 31 January deadline — what’s changed is the reporting cadence through the year, and the requirement for MTD-compatible software rather than paper records or an incompatible spreadsheet.
Reporting RTI and MTD to HMRC
The confusion is understandable. Both RTI and MTD involve regular digital reporting to HMRC, both apply to small business owners, and both sit under the general digital-tax push HMRC has been running for over a decade. It’s an easy assumption that MTD is just the next stage of the same process that brought in RTI for payroll.
They’re genuinely separate systems covering different obligations, though. RTI reports what you pay your employees — PAYE and National Insurance — every time you run payroll. MTD for Income Tax reports your own business income and expenses as a sole trader or landlord, for Income Tax Self Assessment, on a quarterly cycle. A sole trader with no employees has zero RTI obligations and, above the income threshold, full MTD obligations. A limited company director paying themselves through PAYE has RTI obligations through company payroll and no MTD obligations at all, since MTD for Income Tax doesn’t apply to companies — a Corporation Tax equivalent has been discussed but isn’t on the same timeline.
The genuinely overlapping case is a sole trader who also employs staff — a tradesperson with a couple of employees, say, or a small retailer trading as a sole trader rather than a limited company. That person runs PAYE payroll for their staff (RTI) and separately reports their own self-employment income through MTD if they’re above the threshold. Both are real, both need attention, and the software for one doesn’t automatically cover the other.
Sole-trader employers checklist
If you’re a sole trader with employees and your self-employment income (plus any rental income) clears £50,000, you need MTD-compatible software for your Self Assessment reporting from April 2026 — that’s about your personal income tax position as a self-employed individual, entirely separate from your business’s payroll.
Your payroll software, handling RTI for your staff, doesn’t need to change because of MTD. It was already digital, already reporting to HMRC regularly, and MTD for Income Tax has no bearing on PAYE reporting requirements.
Where it can get genuinely confusing is an all-in-one platform — FreeAgent or QuickBooks, say — handling both your personal Self Assessment and your payroll in the same product. Check that both sides are actually compliant and current, since they’re functionally separate features sharing a login rather than one unified system.
What MTD does not impact
Your PAYE reporting stays exactly as it was. You don’t need new payroll software because of MTD specifically, and none of your other payroll compliance — auto-enrolment, RTI deadlines, statutory payments — is affected by whether you happen to be in scope for MTD for Income Tax.
It also doesn’t currently apply to limited companies for Corporation Tax. If you trade through a limited company and pay yourself via PAYE and dividends, MTD for Income Tax in its current form doesn’t touch you directly — though it’s worth watching whether a Corporation Tax equivalent arrives on a similar timeline in future years.
MTD for payroll
For a sole trader who also employs people, the practical version of all this is straightforward: check your qualifying income against the relevant year’s threshold to know when MTD actually applies to you, choose MTD-compatible software for Self Assessment if you’re in scope (separate from your payroll tool unless your platform genuinely handles both well), and keep running payroll exactly as you have been, since none of it changes. Don’t assume an “all-in-one” product automatically covers both obligations properly just because it’s marketed that way — check both sides are actually doing their job.
For sole traders working out their payroll needs separate from Self Assessment, our guide to the best payroll software for sole traders covers when payroll software is actually required. For the ongoing payroll reporting that MTD doesn’t change, see our guide to RTI.
