Making Tax Digital For Etsy Sellers – What UK Sole Traders Need To Do

If you run an Etsy shop as a sole trader in the UK, Making Tax Digital is coming for you. Not immediately, for most people — but sooner than you think. The rules are already live for some sellers, and HMRC has quietly been collecting your Etsy income data since January 2025.

This guide cuts through the noise. Here’s what Making Tax Digital for Income Tax actually means, whether you’re in scope, and what you need to do about it.

TLDR

Making Tax Digital for Income Tax (MTD ITSA) replaces the single annual Self Assessment with quarterly reporting + a final declaration
It’s rolling out based on gross income (turnover, not profit): £50k+ from April 2026, £30k+ from April 2027, £20k+ from April 2028
Etsy has been legally required to report your income to HMRC since January 2025 — so they already know what you’re earning
You’ll need MTD-compatible software (or a bank account that handles it built-in, like Starling)
If you’re not in scope yet, it’s still worth getting organised now

What is Making Tax Digital for Income Tax?

Making Tax Digital for Income Tax — also called MTD ITSA or MTD for Income Tax — is HMRC’s overhaul of how self-employed people and landlords report their income. The old system, where you filed one Self Assessment return by 31 January each year, is being replaced with quarterly digital updates sent directly to HMRC throughout the year.

The government’s argument is that more frequent reporting reduces errors and helps people stay on top of their tax bill rather than facing a shock in January. Whether you buy that or not, it’s happening.

For Etsy sellers operating as sole traders, this is directly relevant. If your Etsy income — combined with any other self-employment income — crosses the relevant threshold, you’re in scope.

Does It Apply to You? The Income Thresholds

MTD ITSA is being phased in based on qualifying income — and the thresholds drop over time:

From	Qualifying income threshold
6 April 2026	Over £50,000
6 April 2027	Over £30,000
6 April 2028	Over £20,000

Two things that catch people out:

It’s gross income, not profit. The threshold is based on your total turnover — what Etsy pays into your bank — before any expenses. If you’re pulling in £55,000 in Etsy sales but spending £30,000 on stock, printing, and fees, you’re above the April 2026 threshold even though your profit is much lower.

All self-employment income is combined. Got a part-time freelance gig on top of your Etsy shop? HMRC adds them together. A £32,000 Etsy turnover plus £20,000 in freelance work puts you at £52,000 — above the April 2026 threshold.

If you’re unsure about your qualifying income, your Self Assessment return from the last tax year is the place to start.

How Etsy Already Reports Your Income to HMRC

This one surprises a lot of sellers. Since January 2025, Etsy — along with other online marketplaces like eBay, Vinted, and Amazon — has been legally required to share seller income data with HMRC. The first report covered all sales made during 2024.

That means HMRC isn’t relying on you to volunteer your Etsy earnings. They have the numbers. This isn’t a reason to panic if you’ve been filing correctly — but it’s a very good reason to make sure your records are accurate and your Self Assessment reflects your actual income.

MTD takes this a step further. Instead of HMRC cross-referencing your annual return against Etsy’s data at the end of the year, you’ll be sending updates quarterly — making the whole process more transparent in real time.

What Changes: Quarterly Reporting Instead of One Return

Under MTD ITSA, the tax year is split into four quarters. You submit an update to HMRC after each one, then a Final Declaration at the end of the year. That’s five submissions instead of one.

The quarterly update deadlines are:

Quarter 1 (April–June): 5 August
Quarter 2 (July–September): 5 November
Quarter 3 (October–December): 5 February
Quarter 4 (January–March): 5 May
Final Declaration: 31 January (same deadline as the old Self Assessment return)

Each quarterly update is a summary of your income and expenses for that period — not a tax payment. You’re not paying tax four times a year. You’re just reporting what you’ve earned and spent, so HMRC has a running picture. The tax bill is still settled through the Final Declaration.

The Final Declaration replaces the traditional Self Assessment return. It’s where you confirm your total income, claim any reliefs or allowances, and settle your liability.

Digital Record Keeping — What This Means in Practice

MTD requires you to keep digital records of your income and expenses. Not a shoebox of receipts. Not a notebook. Digital records, maintained throughout the year, that can feed into your quarterly submissions.

For an Etsy seller, that means recording things like:

Etsy sales income (your payouts)
Etsy fees and transaction charges
Postage and packaging costs
Materials or stock purchases (if applicable)
Software subscriptions used for the business
Any other allowable expenses

The records need to be kept in software that’s compatible with HMRC’s MTD system. A spreadsheet on its own won’t qualify — unless you use bridging software to connect it (more on that below).

The good news is that if you’re already keeping decent records for your Self Assessment, the habit is largely the same. The difference is the software and the frequency of submission.

What Software Do You Need?

This is the most practical question, and the answer depends on what you’re already using.

MTD-compatible accounting software

The main options that work with MTD ITSA for sole traders are Xero, QuickBooks, FreeAgent, and Sage. All four have plans aimed at self-employed individuals and will handle your record keeping, quarterly submissions, and Final Declaration in one place. Prices vary — expect to pay roughly £10–30/month depending on the plan and any introductory offer.

If you sell across multiple platforms or want something that integrates directly with Etsy to pull in transaction data automatically, it’s worth looking at tools like Link My Books, which connects marketplace income to your accounting software without manual entry.

HMRC’s free tool

HMRC is developing its own free submission tool for MTD ITSA that covers basic digital record keeping and quarterly submissions at no cost. It’s aimed at sole traders with straightforward affairs — which covers a lot of Etsy sellers. Worth checking HMRC’s current list of compatible software for the latest options.

Your bank account might already cover it

This is the bit most people miss. Some business bank accounts have MTD-compatible record keeping built in, which means you may not need separate accounting software at all.

Starling Bank, for example, has integrated MTD for Income Tax functionality that lets you categorise transactions and submit quarterly updates directly from the app. If you’re already using Starling (or considering a business account), it’s worth checking whether their MTD tools cover your needs before paying for something else.

Bridging software (if you use spreadsheets)

If you currently track your income and expenses on a spreadsheet and you’d rather keep doing that, bridging software is the middle ground. It pulls your figures from the spreadsheet and submits them to HMRC in the required format. You keep your spreadsheet — the bridging software handles the connection to HMRC. It’s not the most elegant solution, but it works.

What to Do Right Now — Step by Step

1. Work out whether you’re in scope and when

Look at your last Self Assessment return. What was your total gross self-employment income? That number — not your profit — determines which threshold applies to you and when.

2. Check if any other income counts

Remember, HMRC combines all self-employment sources. If you have freelance work, other side income, or multiple shops, add them together.

3. Choose your software

If you’re above the April 2026 threshold (£50k+), you needed to be set up from 6 April 2026. If you’re in the later cohorts, use the time to choose and trial your software before it becomes mandatory. Don’t leave this until the last minute — getting your records in order from the start of a tax year is much easier than reconstructing them later.

4. Start keeping digital records now

Even if you’re not yet required to do MTD, starting to keep digital records now means the transition will be seamless. Log your Etsy payouts, fees, and expenses as they happen rather than trying to reconstruct them at year-end.

5. Register for MTD with HMRC

HMRC will contact you when it’s time to sign up. You’ll register through your Government Gateway account and authorise your chosen software to connect to HMRC on your behalf. Don’t ignore the letters when they arrive.

6. Consider whether you need an accountant

MTD is designed to be manageable without one, especially if your Etsy business is your main self-employment income and your affairs are fairly straightforward. That said, if you’re combining Etsy with employment income, rental income, or other complexity, having an accountant review your setup is money well spent.

FAQ

Do I need to do Making Tax Digital if I sell on Etsy?

If your gross income from Etsy and any other self-employment is above £50,000, yes — from April 2026. The threshold drops to £30,000 in April 2027 and £20,000 in April 2028. Below £20,000, you won’t be required to use MTD — though that threshold may change in future.

What counts as qualifying income for MTD ITSA?

Qualifying income is your gross self-employment income — total turnover before expenses — plus any property income. It’s not your profit. If you earn £40,000 from Etsy and £15,000 from a freelance side project, your qualifying income is £55,000.

Is Making Tax Digital the same as Self Assessment?

No. Self Assessment is being replaced by MTD ITSA for those in scope. Instead of one annual return, you’ll submit four quarterly updates plus a Final Declaration each year. The Final Declaration replaces the old tax return and is still due by 31 January.

What happens if I don’t sign up for MTD?

HMRC can issue penalties for non-compliance. The penalty system is points-based — each missed submission adds a point, and once you hit a threshold, a financial penalty kicks in. It’s not worth the risk. If you’re in scope, you need to sign up.

Do I need an accountant for Making Tax Digital?

Not necessarily. If your Etsy business is your main income source and your affairs are relatively simple, the right software will walk you through it. But if you’ve got multiple income streams, property income, or you’ve been behind on your Self Assessment, getting an accountant to help you set things up properly is a sensible investment.

The trading allowance — does that affect any of this?

The £1,000 trading allowance lets you earn up to £1,000 in gross self-employment income without paying tax or filing a Self Assessment. If your Etsy income is below £1,000, you don’t need to report it. Above that, you do. MTD ITSA kicks in at much higher thresholds, but you still need to be registered for Self Assessment before you can be enrolled in MTD.