How does Making Tax Digital affect landlords who are sole traders?

Introduction: why Making Tax Digital matters to landlords who are sole traders

Making Tax Digital (often shortened to “MTD”) is the UK government’s long-term programme to modernise the tax system. In practical terms, it moves record-keeping and reporting away from annual, paper-based or spreadsheet-only approaches and towards ongoing digital records and regular submissions through compatible software.

If you are a landlord who is also a sole trader, you may feel as though you are juggling two worlds: property income on one hand and self-employment income on the other. While many landlords do not think of themselves as “businesses” in the same way as tradespeople or consultants, HMRC’s digital direction tends to treat recurring income activities similarly from an administration perspective: keep proper digital records, submit information more frequently, and reduce the scope for errors that happen when everything is done in one annual scramble.

This article explains how MTD affects landlords who are sole traders, what changes in day-to-day practice, where the common confusion lies (especially around whether property income counts as “trading” income), and how to prepare sensibly without overcomplicating your life. The goal is not to overwhelm you with jargon, but to give you a clear, practical roadmap.

Clarifying the terms: landlord, sole trader, and what HMRC means by each

Before looking at MTD’s impact, it’s crucial to define the categories. A “landlord” is anyone who receives income from letting property. That might be one buy-to-let flat, a portfolio of houses, a room in your home, or furnished holiday lets. A “sole trader” is a self-employed individual running their own business in their personal name (or a trading name), reporting profits through Self Assessment.

Here is the key point that trips people up: property letting income is usually treated as “property income,” not “trading income.” In other words, being a landlord does not automatically make you a sole trader for that letting activity, even if it feels like a business. You can still be a sole trader because you have a separate self-employment (for example, you’re a plumber, designer, consultant, or shop owner) while also earning rental income as an individual.

So, when we talk about “landlords who are sole traders,” we typically mean someone with self-employment income and rental income, both reported under Self Assessment. The MTD impact depends on which income streams fall within the MTD rules and when.

What Making Tax Digital is trying to change

Traditionally, many individuals have done something like this: keep a folder of invoices and bank statements (or a basic spreadsheet), then once a year hand everything to an accountant or sit down for a weekend to complete the tax return. The MTD model aims to shift that to a more continuous process.

At a high level, MTD involves:

1) Keeping digital records of income and expenses in a software solution or app that is “MTD-compatible.”

2) Using “digital links” between systems. That generally means avoiding manual copying and pasting that could break the digital trail, particularly when moving totals from one place to another.

3) Sending updates to HMRC more regularly (often described as quarterly updates), plus an end-of-period finalisation.

4) Submitting the final declaration for the tax year through the digital system.

For landlords, the practical shift is usually less about tax rules changing (the underlying tax rules for allowable expenses and taxable profit largely remain) and more about administration: the timing of reporting, the method of record keeping, and the tools you use.

MTD for Income Tax: the part most relevant to individual landlords and sole traders

When people hear “MTD,” they sometimes think of VAT first, because VAT has already moved into a digital submission model for many businesses. However, for landlords and sole traders, the most relevant piece is MTD for Income Tax (sometimes called “MTD for ITSA,” Income Tax Self Assessment).

MTD for Income Tax is designed to replace the annual Self Assessment return process for those within scope, introducing periodic reporting and a digital end-of-year finalisation. For a landlord who is also a sole trader, this is significant because you may have multiple income sources that are both reported through Income Tax: your self-employment profits and your rental profits.

Under the MTD approach, you do not simply “do a tax return” once a year in the old way. Instead, you maintain ongoing digital records and send updates during the year for each relevant income source. Then you complete an end-of-year process to finalise the figures and make the final declaration.

Does MTD treat rental income and self-employment income differently?

Rental income and self-employment income remain separate “sources” for tax purposes, even if you are the same individual reporting both. In the MTD world, you should expect a separate stream of reporting for each relevant source:

Self-employment: Your business income and expenses, recorded digitally and reported periodically.

Property income: Rental income and related expenses, recorded digitally and reported periodically (if within scope).

This separation can be helpful because it encourages better clarity: you can see your trade’s performance separately from your property performance. But it can also feel like more moving parts, because you may be sending multiple updates across the year.

A common misconception is that if you already use accounting software for your sole trade, you can simply “lump in” rental income there without thinking. You can do that if your software supports it and you keep clean separation and correct categorisation. But you must be careful: mixing everything in one set of categories can create confusion and mistakes, particularly when you want to analyse your property portfolio separately or when certain expenses apply to one activity but not the other.

Who is in scope: thresholds and the “combined income” question

One of the most important practical questions is whether you are required to follow MTD for Income Tax at all. The rules use an income threshold to determine whether an individual is within scope. For a landlord who is also a sole trader, the threshold question often becomes: is it based on each activity separately, or on combined income?

In general terms, the threshold is assessed using qualifying income from self-employment and property combined. That means even if your rental income alone is modest, the combination of your rental income and sole-trader income could push you into scope. Conversely, you might have a good level of rental income but little self-employment income and still be in scope due to the combined total.

This matters because it changes the planning approach. Some people assume, “My trade is small, so I don’t need to worry,” but their rental income pushes the total over the threshold. Others assume, “My rental portfolio is small,” but their trade takes them over. Either way, the result is the same: if you are within scope, you need a workable digital record-keeping and submission approach that covers both sources.

What actually changes for a landlord who is also a sole trader

When MTD for Income Tax applies, changes usually appear in five areas:

1) You need to keep digital records in a compliant way

You may already use spreadsheets, banking apps, or bookkeeping software. MTD pushes you towards a more structured approach that captures key transactional details digitally and preserves an electronic audit trail. The key detail is not “you must use a fancy system,” but “you must keep digital records and submit through compatible software.”

If you currently do your property accounts once a year, you may need to move to more regular bookkeeping. That does not mean you must do it weekly, but you should avoid leaving it until the end of the year because you’ll have periodic updates to produce.

2) You will send periodic updates rather than relying on one annual return

Periodic updates are often described as “quarterly,” but it’s helpful to think of them as regular snapshots. They are not necessarily the final tax position, and they may not account for all adjustments or reliefs. They are a way of keeping HMRC informed and encouraging a current view of your income and expenses.

For a landlord-sole trader, this means you may send updates for:

- Your sole trade income and expenses

- Your property income and expenses

Depending on how your software is set up, you may submit these in one workflow or separate workflows, but they reflect different sources.

3) End-of-year finalisation becomes a distinct step

At the end of the tax year, you will generally go through an end-of-period process to make final adjustments and confirm the final figures for each source. Then you submit a final declaration for the year. Practically, this resembles what accountants already do: adjust for accruals (if relevant), capital allowances, private-use adjustments, and any other year-end entries. But the mechanics and timing may feel different because you’ve already sent updates during the year.

4) You may need to adapt how you handle shared costs and mixed-use expenses

Many landlord-sole traders have costs that are not neatly separated. For example:

- A mobile phone used partly for trade clients and partly for property management

- Vehicle costs used for business travel and occasional trips to a rental property

- Home office costs that support both activities

In a traditional annual approach, you might estimate splits at year-end. Under an MTD rhythm, you will benefit from having a consistent approach throughout the year. That can be as simple as an agreed percentage split and consistent categorisation, but the key is to avoid erratic treatment each quarter that makes year-end messy.

5) There is a bigger emphasis on process and discipline

MTD is as much about behaviour as it is about technology. It rewards those who have a simple, repeatable process: keep receipts, record transactions, reconcile bank accounts, and review totals regularly. For a landlord who is also a sole trader, this can be a blessing: you get better visibility over cash flow and profitability across both activities. But if you prefer to “do tax once a year,” it can feel like an unwelcome change.

What kinds of landlords are most affected?

Not all landlords feel MTD changes equally. The impact depends on how you currently operate and what your portfolio looks like.

Landlords with one or two properties and simple finances

If you have straightforward rental income and a handful of expenses (insurance, letting agent fees, repairs), the bookkeeping itself may not be hard. The challenge is simply adopting a compliant digital system and keeping up with periodic updates.

Landlords with multiple properties, mixed letting types, or frequent repairs

If you manage a portfolio with frequent maintenance, multiple contractors, and varying occupancy, you may already have a more structured record-keeping system. In this case, MTD might be more of an administrative change than a complete overhaul. The periodic update requirement may still feel like extra work, but you may already be tracking the numbers frequently for business reasons.

Landlords who also run a busy sole trade

This group often feels the biggest time pressure. Your main trade already demands invoicing, chasing payments, buying materials, and dealing with clients. Rental activity can be an additional load. MTD can intensify that because both income sources may require periodic attention. The practical solution is to streamline: automate bank feeds, standardise categories, and reduce manual admin wherever possible.

Digital record-keeping for property: what you should capture

When you keep digital records for rental income, think in terms of transactions and categories. Typical items include:

Income: Rent received, service charges (if applicable), insurance recoveries (if charged on), and any other letting-related receipts.

Expenses: Letting agent fees, property insurance, repairs and maintenance, safety certificates, cleaning, gardening, accountancy fees (where applicable), advertising, and certain professional fees.

Finance costs: Mortgage interest relief rules have their own treatment for many residential landlords, so categorisation matters for accurate year-end handling.

Capital vs revenue: Some property spend is capital (improvement) rather than revenue (repairs). MTD does not remove the need to distinguish this. In fact, more frequent bookkeeping makes it more important to label things correctly so you don’t have to unravel a year’s worth of transactions later.

Good software or a disciplined spreadsheet-plus-bridging approach can make this easier. The real win is consistency: the same type of expense should land in the same category each time.

How to handle a separate “property bank account” versus one mixed account

Many landlords use one bank account for everything, especially if the portfolio is small. From a pure tax perspective, you can do this, but from a compliance and sanity perspective, it creates more admin. With MTD’s more regular reporting, mixed accounts can become a constant source of confusion.

If you can, consider separating:

- One account for your sole trade

- One account for property income and property expenses

This is not mandatory in itself, but it makes digital record-keeping far easier. It reduces the need to mark personal spending or trade spending as “not relevant” within the property records, and it improves your ability to reconcile bank feeds quickly.

If you cannot separate accounts, then you’ll need a consistent method to identify which transactions belong to which activity. Tagging rules, bank feed descriptions, and routine monthly checks become much more important.

Quarterly updates: what they are (and what they are not)

One fear people have is that quarterly updates mean “four tax bills a year” or that HMRC will calculate and demand payment each quarter. In practice, periodic updates are more about reporting than payment. They are intended to provide HMRC with more up-to-date information and give taxpayers a clearer sense of their likely tax position during the year.

That said, more frequent visibility can change behaviour. If your software shows an estimated tax position each quarter, you might decide to set aside money more regularly. Many sole traders already do this. Landlords who are used to “rent comes in and I’ll sort tax later” may find it helpful to set up a routine tax savings transfer after each quarter or after each month.

The important thing is to treat quarterly figures as “work in progress.” They may not reflect every adjustment, and they can be refined at year end. The goal is directionally correct reporting supported by your digital records.

How MTD affects the relationship with your accountant or tax adviser

Many landlords and sole traders work with an accountant who prepares annual accounts and submits the tax return. MTD changes the rhythm of that relationship. Instead of one intense annual project, you may have more touchpoints throughout the year.

There are a few common models:

1) You do the bookkeeping and quarterly submissions, accountant does year end. This can work if you are organised and comfortable with software. Your accountant focuses on final adjustments, tax planning, and the final declaration.

2) Accountant does everything, including quarterly submissions. This can reduce stress but will usually cost more, because there is more ongoing work. It may still be cost-effective if it prevents mistakes and frees your time.

3) Hybrid approach. You keep records digitally, reconcile monthly, and your accountant reviews quarterly and submits on your behalf, then finalises the year end. This is often a good balance for landlord-sole traders with limited time.

Whatever model you choose, it becomes more important to agree responsibilities: who categorises transactions, who checks for capital items, and who ensures completeness before each update.

Potential benefits for landlords who are sole traders

MTD is often discussed as a burden, but there are real potential upsides, especially for people managing multiple income sources.

Better visibility of profitability and cash flow

If you keep property and trade records current, you can see how each activity is performing. Are repairs eating into rental profit? Is your trade profit strong but seasonal? Are you building enough cash for tax? These insights are easier when the numbers are maintained regularly rather than reconstructed annually.

Fewer year-end surprises

When records are kept up to date, the year-end process becomes less about finding missing information and more about fine-tuning and ensuring claims are correct. This can reduce stress and reduce the risk of submitting incorrect figures.

Cleaner records if HMRC ever asks questions

Digital record-keeping with an audit trail makes it easier to explain figures. If you ever need to provide evidence for expenses or income, you are not relying on faded receipts or memory. You have a structured dataset and often attached digital copies of receipts.

More efficient administration through automation

Modern bookkeeping tools can automate bank feeds, recurring transactions, and basic categorisation. Once set up, this can actually reduce the time you spend on admin compared with a manual end-of-year process.

Common pain points and how to avoid them

For landlord-sole traders, the most common issues tend to be practical rather than technical.

Mixing property and trade expenses

It’s surprisingly easy to code an expense to the wrong activity, especially if you manage everything from one bank account. Avoid this by using separate accounts where possible or by using clear tagging rules and consistent categories.

Not knowing whether an expense is capital or revenue

Repairs versus improvements can be a grey area. If you’re unsure, flag transactions during the year so you can discuss them with your accountant before finalisation. The worst approach is to guess repeatedly each quarter and then try to undo it later.

Forgetting about irregular income events

Some landlords have irregular items: insurance payouts, tenant contributions to repairs, one-off fees, or periods of vacancy. Keeping records regularly helps ensure these do not get lost. Build a simple habit: once a month, scan your bank feed for anything unusual and add notes while you still remember what it was.

Leaving bookkeeping until the last minute

MTD’s periodic updates make procrastination more expensive. You will feel the pressure more often if you ignore the records. The best mitigation is to schedule a small, repeatable admin slot (for example, 30–60 minutes weekly or every two weeks) so nothing piles up.

Choosing software that doesn’t fit your situation

Some tools are great for trades but clunky for property portfolios; others handle property well but are awkward for invoicing and business expenses. If you have both income sources, look for a tool or combination that can handle both cleanly. If you stay with spreadsheets, ensure you can still meet the digital submission requirement through an appropriate method that preserves a digital link to the submission.

Practical setup: a simple system that works for most landlord-sole traders

You do not need a complicated system. A practical approach often looks like this:

Step 1: Separate or label your finances. Ideally, separate bank accounts for trade and property. If not possible, use consistent transaction references and tags.

Step 2: Pick a record-keeping tool that can store digital records. This might be bookkeeping software with bank feeds, or it might be spreadsheets supported by a compliant submission route. The key is that your records are digital and your submissions are made through compatible software.

Step 3: Use standard categories. Create a chart of categories for trade and a chart of categories for property. Keep them consistent across the year.

Step 4: Build a routine. Monthly reconciliation is a strong baseline. If your volumes are high, do it weekly. If volumes are low, monthly is still manageable and reduces mistakes.

Step 5: Review before each update. Before submitting a periodic update, do a quick reasonableness check: does the rent figure align with tenancy agreements and bank receipts? Are there any large expenses that need explanation or could be capital?

Step 6: Year-end finalisation with professional review if possible. Even if you are confident, a year-end review can help with tax planning and ensure claims are optimised and compliant.

How MTD influences tax planning for landlord-sole traders

Although MTD is primarily administrative, more frequent reporting can affect how you plan.

Tax budgeting: Seeing updated profit figures during the year makes it easier to set aside the right amount for the January and July payments on account (where relevant). If you have both property and trade profits, this is particularly helpful because cash flow may not align across the two.

Timing of expenditure: If you know your trade is having a high-profit year, you might bring forward legitimate business spending. For property, you might schedule planned maintenance strategically. You should never spend just for the sake of spending, but visibility helps you make informed decisions.

Understanding volatility: Rental income can look stable, but large repairs, void periods, or regulatory compliance costs can cause swings. A quarterly rhythm helps you notice trends earlier.

Special situations: jointly owned property, agents, and multiple sources

Many landlords own property jointly with a spouse or partner. In that case, each person reports their share of income and expenses. MTD can make this more complex because records need to be clear about splits. If one person handles admin, the other still needs accurate information for their own reporting. Good digital records make these splits clearer.

If you use a letting agent, you may receive statements and net payments rather than gross rent. For MTD-friendly record keeping, it’s often better to record the gross rent and the agent fees separately (if your data allows), rather than just the net deposit. This makes your records clearer and helps with consistency. If you only ever record the net amount, you can end up with confusing totals and difficulty reconciling statements.

If you have multiple properties and multiple agents, the value of systematisation increases. Consider tracking each property as a separate “project” or “tracking category” inside your bookkeeping tool, so you can see profitability per property. This is not strictly required for tax reporting, but it is extremely helpful for management decisions.

What to do now: a step-by-step preparation checklist

If you are a landlord and a sole trader and you expect to fall within MTD for Income Tax, you can prepare with a structured checklist:

1) Identify your income sources clearly. List your self-employment trades (some people have more than one) and your property income sources.

2) Estimate whether your combined qualifying income is likely to place you within scope. Use your most recent tax return as a starting point.

3) Decide how you will keep digital records. Choose software (or a digital process) that you can actually maintain.

4) Clean up your categories. Create consistent categories for both trade and property expenses. Keep a note of what goes where.

5) Improve your document capture. Decide how you will store receipts and invoices digitally. Many people use a phone scanning app or software that captures images and attaches them to transactions.

6) Set a routine. Put a recurring monthly bookkeeping session in your diary. If your schedule is hectic, keep the session short and frequent rather than long and rare.

7) Speak to your accountant early if you have one. Agree who does what, how quarterly updates will be handled, and how issues like capital expenditure will be flagged.

Conclusion: turning MTD from a burden into a workable system

For landlords who are sole traders, Making Tax Digital is less about changing what you pay and more about changing how you manage and report your financial information. The biggest shift is moving from an annual event to an ongoing process. That can feel intrusive at first, especially if you are busy running a trade and treating property as a “side investment.” But with the right setup, MTD can improve your visibility, reduce year-end panic, and help you run both activities with more confidence.

The best approach is to keep it simple: separate or clearly label finances, use consistent categories, reconcile regularly, and treat periodic updates as routine maintenance rather than major projects. If you do that, MTD becomes a manageable administrative framework rather than a constant headache—and you are likely to end up with better records and fewer surprises along the way.