The whole flow on one page
- A customer pays youTurnover / sales / income
Every pound customers or tenants pay you – cash, card, bank transfer, app payout, tips. Counted before any costs.
- You spend money to do the workAllowable expenses
Costs that are “wholly and exclusively” for the business: materials, fuel, tools, rent of your workspace, insurance, phone (business share).
- You buy something that lasts – a van, a laptop, a chairCapital expenditure (claimed as capital allowances or, on the cash basis, as an expense)
Most sole traders now use the cash basis, so most equipment is simply deducted in the year you pay for it. Cars are the main exception.
- You write it all down / keep the receiptsBookkeeping · digital records
Under MTD this has to happen in HMRC-recognised software (or a spreadsheet linked with “bridging software”). Snapping a receipt into an app counts.
- You pay yourself from the business moneyDrawings
When you are self-employed, money you take for yourself is not a wage and not an expense. It doesn’t reduce your tax.
- Every three months you send HMRC a summaryQuarterly update
Totals of income and expenses by category. No tax is paid at this point, and mistakes can be fixed in the next update.
- After 5 April you tidy up the yearYear-end adjustments
Adding things that weren’t in the quarterly figures – private-use adjustments, capital allowances, CIS deductions, other income.
- You confirm the year’s figuresFinal declaration (replaces the Self Assessment tax return)
Due by 31 January after the tax year ends. HMRC then calculates your tax.
- Takings minus costsTaxable profit
This – not your turnover – is what income tax and National Insurance are charged on.
- You pay the taxBalancing payment + payments on account
Pay by 31 January. If your bill is over £1,000 you usually also pay half of next year’s bill in advance on 31 January and 31 July.
Glossary
| Term | Plain English |
|---|---|
| Tax year | 6 April to 5 April the next year. |
| Qualifying income | Your self-employed takings plus rent received, before costs. Decides whether MTD applies. |
| Turnover | Everything customers paid you. |
| Gross / net | Gross = the full amount. Net = after something has been taken off (fees, tax, CIS). |
| Allowable expense | A cost you can take off your takings before tax is worked out. |
| Wholly and exclusively | The test for an expense: was it only for the business? If it’s mixed (phone, car), claim the business share. |
| Cash basis | Count money when it actually comes in or goes out. The default for sole traders. |
| Accruals basis | Count income when you invoice and costs when you’re billed, even if not yet paid. |
| Drawings | Money you take out for yourself. Not an expense. |
| Profit | Turnover minus allowable expenses. What you pay tax on. |
| Personal allowance | The first £12,570 of income you can have tax-free. |
| Class 4 National Insurance | NI for the self-employed: 6% of profit between £12,570 and £50,270, 2% above. |
| UTR | Unique Taxpayer Reference – the 10-digit number HMRC gives you when you register for Self Assessment. |
| Digital records | Your income and expenses kept in MTD-compatible software. |
| Bridging software | A tool that sends figures from your spreadsheet to HMRC. |
| Quarterly update | The three-monthly summary you (or your accountant) send HMRC. |
| Final declaration | The end-of-year confirmation that replaces the tax return. |
| Payments on account | Advance payments towards next year’s tax, each half of this year’s bill. |
| CIS deduction | Tax a building contractor takes from your pay and sends to HMRC for you. |
| Trading allowance | If your total self-employed takings are £1,000 or less, you don’t need to declare them. |
Sources
- Find out if and when you need to use Making Tax Digital for Income Tax – GOV.UK
- Work out your qualifying income for Making Tax Digital for Income Tax – GOV.UK
- Send quarterly updates using Making Tax Digital for Income Tax – GOV.UK
- Find software that works with Making Tax Digital for Income Tax – GOV.UK
- Penalties for Making Tax Digital for Income Tax – GOV.UK
General information about HMRC’s Making Tax Digital rules as of 26 October 2026, not tax advice. MTD Match is not affiliated with HMRC.