The problem
Since 6 April 2026, sole traders whose qualifying self-employment and property income was over $66,500£50,000€59,500A$96,000C$94,000 in 2024 to 2025 must use Making Tax Digital for Income Tax, sending quarterly updates to HMRC from compatible software. The threshold falls to $39,900£30,000€35,700A$57,600C$56,400 from April 2027 and $26,600£20,000€23,800A$38,400C$37,600 from April 2028. A designer used to one tax return a year now has 4 update deadlines a year: 7 August, 7 November, 7 February and 7 May.
What the AI does
Xero's UK pricing page lists all four plans as ready for Making Tax Digital for Income Tax and says Xero is HMRC-recognized software. Bank feeds bring transactions in, you categorize income and expenses through the quarter, and the quarterly update goes to HMRC from the software. Record the four deadlines first in your own diary or with your accountant, and treat Xero as where the records live. HMRC says it won't apply penalty points for late quarterly updates in the 2026 to 2027 tax year, but they still apply to late tax returns.
A worked example
A freelance designer in Bristol had qualifying income of $77,140£58,000€69,020A$111,360C$109,040 in 2024 to 2025 and keeps a spreadsheet of invoices and receipts. They sign up for Making Tax Digital for Income Tax, move their records into Xero Ignite and put the 4 update deadlines in their diary.
Before
1 spreadsheet, 1 tax return a year and 0 quarterly updates
After
Transactions categorized monthly in Xero and 4 quarterly updates a year sent on time
What it's worth
A compliance record rather than a money saving: digital records and on-time quarterly updates, as HMRC now requires above the threshold. Cost: Ignite is $24£18€21A$35C$34 a month excluding VAT, with 20 invoices and 10 bills; new UK customers can get 90% off the base plan for the first 6 months, about $3£2€2A$4C$4 a month. If you already pay an accountant, ask whether their fee covers quarterly updates.
How to set it up
- Check your qualifying income against HMRC's guidance to see when Making Tax Digital for Income Tax applies to you.
- Put the four quarterly deadlines (7 August, 7 November, 7 February and 7 May) in your main diary first, with a reminder a week before each, and check them against HMRC's page every year.
- Sign up for Making Tax Digital for Income Tax with HMRC and authorize Xero, or ask your accountant to do it.
- Connect your business bank account and categorize transactions at least monthly.
- Before each deadline, check the quarter's figures and send the update, and note the date it was sent.
What goes wrong
- Bank feeds and reminders can stop without telling you, for example when a bank connection expires. Check the feed and your diary deadlines every month rather than relying on the software.
- Ignite is limited to 20 invoices and 10 bills. Busy months may push you to Grow at $52£39€46A$75C$73.
- Penalty points for late quarterly updates are waived only for the 2026 to 2027 tax year, and late tax returns still get them. Don't let the first year set a habit.
- The 90% discount lasts 6 months, then the full price applies.