Xero

Xero is HMRC-recognised for Making Tax Digital for Income Tax, letting sole traders keep digital records and submit quarterly updates straight to HMRC from one place. Plans start from £7 a month, excluding VAT.

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At a glance

Xero is fully HMRC-recognised for Making Tax Digital for Income Tax, so sole traders can keep digital records and file every quarterly update and the final declaration without needing separate bridging software. Every current Xero plan, including the £7-a-month Simple plan, is marked “MTD for Income Tax ready”.

£7/m

5

Simple Plan

MTD-ready plans

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Is Xero HMRC-recognised for MTD?

Yes. Xero is on HMRC’s official list of recognised software for Making Tax Digital for Income Tax. It connects directly to HMRC’s systems, so you can keep digital records and submit quarterly updates and your final declaration inside Xero itself, with no second bridging tool needed. Every current Xero plan - from the £7-a-month Simple plan up to Ultimate - is listed as “MTD for Income Tax ready” on Xero’s UK pricing page.

How does Xero handle MTD for Income Tax?

Digital record keeping: bank feeds import transactions automatically, and Xero’s smart document capture (Hubdoc) lets you photograph or upload receipts and invoices, so income and expenses are recorded digitally as they happen
Quarterly updates: Xero builds each quarterly summary from your digital records, then you review the figures and submit directly to HMRC from within the software, with no manual re-entry or spreadsheet exports
Final declaration: at year end, Xero pulls together the four quarterly updates plus any other income, reliefs or adjustments so you can complete and submit the final declaration by the 31 January deadline
Running tax liability: Xero shows what’s been submitted, what’s still due, and a running estimate of tax owed throughout the year

Key features

Direct HMRC submission via Xero’s own MTD connection - no bridging software required
Automatic bank feed imports for ongoing digital record keeping
Smart receipt and document capture (Hubdoc), included on all plans
Per-business quarterly update tracking for sole traders with multiple income sources
Single final declaration workflow that pulls together all quarterly data
Running tax liability estimate visible throughout the year

Which Xero plan do you need for MTD for IT?

There’s no separate “MTD tier” - every current Xero plan is MTD for IT ready. For a sole trader whose only requirement is MTD for IT compliance, Simple or Ignite is usually enough.

Simple - £7/month

An entry-level plan with limited invoices and bills:

MTD for IT ready, with no feature gate on compliance
Useful for getting started, though most sole traders outgrow the limits quickly

Ignite - £18/month

The plan most sole traders actually need:

Unlimited invoices and bills
Automatic bank feeds
Hubdoc automation for receipts

Grow, Comprehensive and Ultimate - £39 to £70/month

Aimed at growing or established businesses:

Multi-currency support, payroll and more detailed reporting
Likely more than a typical sole trader needs on day one
Useful to know about as an upgrade path

Check Xero’s UK pricing page for the latest terms before signing up.

Pros and cons

Pros:

HMRC-recognised, so no bridging software or extra subscription is needed to stay compliant
Even the cheapest plan is MTD for IT ready, so you’re not forced onto a pricier tier just to comply
Automatic bank feeds and receipt capture cut manual admin around each quarterly deadline
Handles multiple income sources (self-employment plus property) with separate quarterly updates but one final declaration
Ongoing visibility of estimated tax owed, useful given the more frequent reporting cycle

Cons:

Prices are quoted excluding VAT, so real monthly cost is 20% higher than advertised
Prices rose on 1 September 2026, and any new-customer discount is a temporary promotion, not the ongoing price
The cheapest Simple plan is limited and aimed only at non-VAT-registered traders, so growing or VAT-registered sole traders will need to upgrade
MTD compliance comes bundled with a full accounting platform, so if all you want is bare-bones quarterly submission, a dedicated low-cost bridging tool may cost less

Who is Xero best for MTD for Income Tax?

For sole traders who already need proper bookkeeping software - invoicing, bank reconciliation, expense tracking - Xero’s HMRC recognition for MTD for IT means compliance is built in rather than bolted on. You keep digital records and submit quarterly updates and your final declaration from the same place you already run your books. If your only requirement is to satisfy MTD for IT as cheaply as possible and you don’t need wider accounting features, it’s worth comparing Xero’s Simple or Ignite plans against dedicated low-cost bridging or MTD-only tools. For a general look at Xero as an everyday accounting tool, see our full Xero review elsewhere on this site.

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Frequently asked questions

Is Xero free for Making Tax Digital for Income Tax?

No, Xero doesn’t have a free tier. Plans start at £7 a month (excl. VAT) on the Simple plan, though new customers can currently get a discount for the first 6 months.

Do I need bridging software as well as Xero?

No. Xero submits quarterly updates and your final declaration directly to HMRC through its own MTD connection, so you don’t need separate bridging software as long as you keep your records in Xero.

Can Xero handle MTD for IT if I have both self-employment and rental income?

Yes. Xero lets you submit a separate quarterly update for each income source (business and property) while pulling everything together into a single final declaration.

When do I need to start using MTD-compliant software like Xero?

If your qualifying income was above £50,000, you needed to comply from April 2026. Sole traders and landlords earning above £30,000 must join from April 2027.

Will I be penalised for late quarterly updates in Xero?

HMRC has said it won’t apply penalties for late quarterly updates during the 2026 to 2027 transitional tax year, though penalty points still apply for a late final tax return, so it’s not worth treating as a long-term free pass.

Compare MTD software for sole traders

Xero is one option among several worth comparing. Browse the full MTD Software directory to compare it against Sage, QuickBooks, FreeAgent and other HMRC-recognised options.

Prices and offers correct at time of publication. Always check the Xero website for current pricing and promotional terms before signing up.