Three-line accounts: at a glance
- Three-line accounts let eligible sole traders and landlords report their income, expenses, and profit to HMRC as three simple totals – rather than a detailed breakdown of every expense category
- Most people within scope of Making Tax Digital for income tax have a qualifying income below the £90,000 VAT threshold, which means many may be eligible to use this simplified reporting approach
- The first quarterly update deadline is 7 August 2026, covering 6 April to 5 July 2026 – so now is a good time to check your software is set up and your records are up to date
If you’re self-employed or a landlord, Making Tax Digital (MTD) for Income Tax is no longer a future change to plan for, for many people, it’s now a reality. The first group of affected taxpayers are already keeping digital records – and the first quarterly update deadline is fast approaching.
If you’re using the new standard quarterly reporting periods, the first update covers 6 April to 5 July 2026, and must be submitted by 7 August 2026. This makes July the ideal time to make sure your digital records are complete, your software is ready, and your income and expenses are up to date.
That also makes three-line accounts especially relevant. The phrase can sound like accounting jargon, but the concept is surprisingly simple. Instead of providing HMRC with a detailed breakdown of every expense category, eligible businesses can use a simplified approach based on three headline figures: income, expenses, and profit.
Combined with HMRC-compatible software, this can make Making Tax Digital feel much less daunting than many people first imagine.
What are three-line accounts?
Three-line accounts are a simplified way of reporting business or property income to HMRC.
Rather than breaking down expenses into separate categories such as advertising, travel, insurance, repairs, or professional fees, eligible businesses can provide a summary using just three figures:
- Total income – all income received from your business or property before expenses.
- Total allowable expenses – the total of your eligible business costs.
- Net profit or loss – your income minus your allowable expenses.
Although the figures are simplified, your record keeping is not. HMRC still expects you to keep accurate digital records and retain evidence such as receipts, invoices, and bank records in case they’re ever needed.
Think of three-line accounts as a simpler way of reporting your figures, rather than a simpler way of keeping your records.
Who can use three-line accounts?
Three-line accounts are intended for businesses with relatively straightforward tax affairs.
They’re commonly available to sole traders and landlords with turnover below the VAT registration threshold, which is currently £90,000. As a result, many people now within the scope of Making Tax Digital for Income Tax may still be eligible to use this simplified reporting approach.
However, eligibility depends on your individual circumstances. Certain types of income or expenses may need to be treated differently, and businesses with more complex affairs may need to provide more detailed information.
If you’re unsure whether simplified reporting applies to you, it’s worth checking HMRC’s guidance or speaking to a qualified tax adviser.
How quarterly reporting changes things
The biggest change under Making Tax Digital isn’t necessarily what you report, it’s when you report it.
Instead of waiting until after the end of the tax year to organise your records, you’ll now keep digital records throughout the year and send quarterly updates to HMRC using compatible software.
But remember: quarterly updates aren’t tax returns. They’re summaries of the income and expenses you’ve recorded during the quarter. You don’t usually need to make year-end accounting or tax adjustments before submitting them, and HMRC doesn’t receive copies of every receipt or invoice.
Compatible bookkeeping software does much of the work behind the scenes, turning the transactions you’ve already recorded into the totals needed for your quarterly reporting.
After each quarterly update, many software providers will also give you an estimate of your tax position – although this may change once your end-of-year information, allowances, and any additional income have been taken into account.
For those following the standard reporting periods, the first quarterly update covers 6 April to 5 July 2026 and must be submitted by 7 August 2026.
For businesses eligible for simplified reporting, keeping digital records can still be straightforward. Compatible software keeps a running total of your income and allowable expenses throughout the quarter, making it much easier to prepare the information needed for each quarterly update.
Rather than starting from scratch every three months, you’re simply reviewing records you’ve already kept up to date.
The benefits: less admin, better visibility
One of the biggest advantages of three-line accounts is their simplicity.
A dog walker, tutor, designer, electrician, or landlord with straightforward finances doesn’t necessarily need the same level of reporting detail as a larger business with multiple employees, stock, and complex accounting requirements.
Where simplified reporting is available, grouping allowable expenses into one total can reduce administration and make bookkeeping easier to understand.
Regular digital record-keeping also offers wider benefits.
Instead of waiting until January to work out how your business has performed, you’ll have a clearer picture throughout the year. That can help you:
- set money aside for tax
- spot changes in cash flow
- identify rising business costs
- chase overdue payments sooner
- make better-informed business decisions
Breaking bookkeeping into smaller, more regular tasks can also reduce stress. Rather than trying to remember transactions from months ago, you stay on top of your records as you go.
Preparing three-line accounts
The process itself is straightforward.
Start by calculating your total income for the period. This includes all business sales, fees, rents, or other relevant income before expenses are deducted.
Next, total your allowable expenses. These are costs incurred wholly and exclusively for your business, or the business proportion of mixed-use expenses where appropriate.
For sole traders, allowable expenses might include materials, advertising, insurance, software subscriptions, professional fees, business travel, and home-working costs where eligible. Read more about allowable expenses for sole traders here.
For landlords, they could include letting agent fees, insurance, repairs and maintenance, and certain service charges. Read more about allowable expenses landlords here.
Finally, subtract your allowable expenses from your income to calculate your profit or loss.
For example:
- income: £18,000
- allowable expenses: £5,200
- net profit: £12,800
While the calculation is relatively simple, accuracy remains important. Keep business and personal finances separate where possible, record transactions promptly, and avoid estimating figures.
Remember: Making Tax Digital requires digital record keeping. A notebook or standalone spreadsheet on its own is unlikely to meet HMRC’s requirements unless it’s connected to compatible software.
Choosing MTD-compatible software
Making Tax Digital requires digital records and quarterly submissions through HMRC-compatible software.
That doesn’t mean every sole trader or landlord needs a feature-packed accounting package. Many software options are designed specifically for smaller businesses and focus on keeping bookkeeping simple.
At a minimum, your software should help you:
- record income and allowable expenses digitally
- store and organise your records
- keep separate business or property businesses where required
- prepare the information needed for quarterly updates
- submit updates directly to HMRC
Many solutions also connect securely to your business bank account, automatically import transactions, and provide an estimate of your tax position throughout the year – reducing manual administration even further.
The right choice depends on your business, your confidence with bookkeeping, and whether you already work with an accountant. The important thing is choosing software that’s straightforward to use, meets HMRC’s requirements, and helps you maintain accurate records consistently.
What to do now: your next steps
If you think Making Tax Digital for Income Tax applies to you, now is the time to prepare.
Check whether you’re required to comply based on your qualifying income, make sure your records cover the period from 6 April to 5 July, and check you’re using HMRC-compatible software before the 7 August submission deadline.
Going forward, a simple monthly routine can make all the difference: record your income, keep your receipts, review your expenses, check your bank transactions, and make sure your records stay up to date.
Three-line accounts won’t be the right approach for everyone – but for many eligible sole traders and landlords, they offer a practical way to simplify reporting without compromising accuracy.
Making Tax Digital doesn’t have to mean more complicated bookkeeping. With good digital records and compatible software in place, quarterly reporting becomes less about preparing accounts from scratch and more about reviewing information that’s already there.
The result is less time spent on paperwork, better visibility of your finances throughout the year, and a far less stressful way to stay on top of your tax obligations.
Coconut is your Making Tax Digital for Income Tax solution brought to you by the team at GoSimpleTax.
Whether you’re on site or on the move, Coconut makes it simple to know what you’re earning, what you’re owed, and how much tax you need to set aside. They have you covered for MTD!
Less faff, more graft.
More tax guides from Mike Parkes
- Quarterly tax reporting: practical ways to stay ahead of the new deadlines
- Making Tax Digital is live – vital next steps for the self-employed
- Making Tax Digital – mistakes to avoid
- Allowable expenses for landlords – what can you claim?
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