If you are self-employed business owner or sole trader, you may have heard about HMRC’s Making Tax Digital (MTD) programme and wondered what it means for you — and whether there is a legitimate way to avoid it. In this article, we explain exactly what the new MTD requirements involve, why they can be costly and time-consuming, and how one pragmatic approach — incorporation as a limited company — can help you sidestep the quarterly filing burden entirely, while also unlocking some meaningful tax advantages along the way.
What Is Make Tax Digital (MTD)?
Making Tax Digital is HMRC’s flagship initiative to modernise the UK tax system. The ambition is to move all taxpayers away from the traditional annual self assessment tax return and towards a system of digital record-keeping and regular reporting throughout the year.
MTD for VAT is already well-established, having been rolled out from 2019. The next major wave — MTD for Income Tax Self Assessment (MTD ITSA) — is the one that will affect the greatest number of people.
Who Will MTD for Income Tax Apply To?
The rollout for MTD ITSA is being phased in as follows:
- From April 2026: Sole traders and landlords with combined gross income above £50,000 will be mandated to comply.
- From April 2027: The threshold drops to £30,000, pulling a significantly larger group into the regime.
- From April 2028: The threshold is expected to fall to £20,000, capturing the vast majority of self-employed individuals and property landlords.
If your trading or rental income exceeds the relevant threshold, MTD ITSA will be compulsory for you.
What Does MTD for Income Tax Actually Require?
This is where the real burden lies. Under MTD ITSA, affected taxpayers must:
1. Keep digital records You will be required to maintain your income and expense records using MTD-compatible software. Spreadsheets alone will not be sufficient unless linked to an approved bridging tool.
2. Submit quarterly updates to HMRC Four times per year — broadly every three months — you must submit a summary of your income and expenses digitally to HMRC. These are not full tax returns, but they are mandatory filings that require your records to be up-to-date and accurate throughout the year, rather than in a once-a-year rush.
3. Submit an End of Period Statement (EOPS) At the end of each tax year, you must confirm the figures for each source of income and make any adjustments — allowances, reliefs, and so on.
4. Submit a Final Declaration This replaces the traditional self assessment return, pulling together your total income picture and confirming your tax liability.
In short, what was previously a single annual task — your self assessment — becomes an ongoing, year-round obligation with four submission deadlines every year.
Why Can MTD Be Onerous and Costly?
For many self-employed individuals and landlords, the quarterly filing requirement creates two distinct problems: time and money.
The Time Cost
Keeping your records meticulously up to date on a quarterly basis is a very different discipline from gathering everything together once a year. If your business finances are relatively straightforward — perhaps you are a sole trader with a modest income and have no time for accounting software — the additional administrative burden can feel disproportionate to the scale of your affairs.
The Cost of Professional Help
Many people currently pay an accountant to prepare and submit their annual self assessment return. Under MTD, that single annual engagement effectively becomes a quarterly one. If your accountant charges for each quarterly submission — and most will need to, given the additional work involved — you could be looking at accounting fees that are three to four times higher than you currently pay, simply to remain compliant.
You may also need to purchase MTD-compatible software or be re-charged for these if your accountant pays directly. The main providers — Xero, QuickBooks, FreeAgent — typically cost between £12 and £35 per month on subscription. For a small business or part-time sole trader, that is an ongoing cost that may deliver you no tangible benefit beyond compliance. You are paying to satisfy a regulatory requirement, not to run your business more effectively.
For many people in this position, the honest question is: is there a better way?
The Practical Solution: Consider Incorporating a Limited Company
Here is where it gets interesting. MTD for Income Tax applies specifically to individuals — sole traders and landlords — who file self assessment returns. It does not apply to limited companies.
Limited companies file their accounts and corporation tax returns once per year with HMRC and Companies House. There is no quarterly reporting obligation for limited companies under MTD, unless the company becomes VAT registered (at which point MTD for VAT applies, as it does for any VAT-registered entity). You can read more about VAT registration for small businesses here.
For many self-employed individuals, incorporating a new limited company can be a genuinely pragmatic way to avoid the MTD quarterly filing requirements altogether, while simultaneously accessing a range of tax planning benefits that are simply not available to sole traders.
We should note that if you are a Landlord it is unlikely this approach will be suitable as there can be significant tax charges which arise on transferring your property to a company.
The Benefits of Operating Through a Limited Company
Beyond avoiding MTD obligations, operating through a limited company offers a suite of advantages that are worth considering in their own right.
1. Lower Rate of Tax on Profits
Sole traders pay Income Tax on their profits at their marginal rate – 20%, 40%, or 45%, depending on their income level – this is before National Insurance is considered. A limited company pays Corporation Tax on its profits. The main rate is currently 25% for profits above £250,000, but the small profits rate of 19% applies to companies with profits up to £50,000, with a tapered rate between the two thresholds.
For a profitable sole trader operating in or near the higher rate band, the tax saving from incorporating can be very significant if you are in a position to leave money in the company or re-invest it. Our article on smart limited company tax planning explores many of these strategies in more depth.
2. Flexible Profit Extraction
One of the most powerful advantages of a limited company is the ability to control when and how you take money out of the business. As a sole trader, you are taxed on your profits in the year they arise, regardless of whether you actually draw that money. As a director-shareholder of a limited company, you can choose to leave profits inside the company and extract them in a later year — for example, in a year when your personal income is lower, or once you reach retirement age.
This timing flexibility is one of the most underused tools in tax planning for business owners.
3. The Optimal Salary and Dividend Combination
Director-shareholders can pay themselves a combination of a low salary (typically set at the National Insurance threshold) and dividends. Dividends are taxed at lower rates than salary — currently 8.75% for basic rate taxpayers, 33.75% at the higher rate — and are not subject to National Insurance contributions. This combination can result in materially lower personal tax and NI compared to an equivalent income taken as a sole trader. The approach can be adaptive to the current tax rates and legislation in place.
4. Pension Contributions as a Tax-Efficient Expense
A limited company can make employer pension contributions on behalf of its directors, which are fully deductible against corporation tax. This is one of the most efficient ways to extract money from a company, as the contribution reduces the company’s taxable profits while building long-term retirement wealth — with no personal tax or NI at the point of contribution. Employer pension contributions are crucially not capped by “relevant” earnings – and can therefore allow greater overall to be made. Our guide to pension carry forward allowance explains how to maximise this further.
5. Limited Liability
Perhaps the most fundamental protection a limited company offers is limited liability. If the business encounters financial difficulties, your personal assets are generally protected. Liquidating the company is an option should matters go wrong. As a sole trader, there is no distinction between business and personal — your personal wealth or family home is potentially exposed to your business risk.
6. A More Professional Image
For contractors, consultants, and freelancers in particular, operating through a limited company is often expected by clients. It can open doors to contracts and engagements that are not available to sole traders, and it conveys a greater sense of permanence and professionalism. Our guide for new limited company contractors is a useful starting point if this is new territory for you.
Important Considerations Before Incorporating
Incorporation is not the right choice for everyone, and the decision deserves careful thought rather than a reflexive response to MTD.
A limited company has its own annual obligations — statutory accounts, a corporation tax return, a confirmation statement to Companies House, and a basic director’s self assessment return. A good accountant can manage all of this, and for most incorporated businesses the total cost of compliance remains very competitive (or even less) against the MTD quarterly costs that would otherwise arise. Read more in our article do I need an accountant for a limited company.
These are all matters where personalised professional advice is essential.
Is Incorporation Right for You?
If you are a sole trader currently earning above the relevant MTD threshold — or approaching it — and you are concerned about the time and cost burden of quarterly digital filing, incorporating a limited company is a conversation worth having with your accountant sooner rather than later.
For many people, the combination of avoiding the MTD quarterly obligation and accessing materially more tax-efficient profit extraction makes incorporation a compelling option. For others, the additional complexity of running a company will outweigh the benefits. The right answer depends on your income level, the nature of your business, your long-term plans, and your personal circumstances. Our comprehensive guide to setting up a limited company is a good place to start if you are weighing up the decision.
Speak to ESDG Accountancy
At ESDG Accountancy, we are a Chartered, ICAEW-regulated firm based in Blackheath, and we advise business owners and individuals across London and the South East — including Greenwich, Sidcup, and Tunbridge Wells — on exactly these kinds of decisions. Whether you are a sole trader weighing up incorporation, a landlord assessing your options ahead of MTD, or someone who simply wants to ensure their tax affairs are as efficient as they can be, we would be delighted to help.
We offer a free, no-obligation introductory call to all prospective clients, and we are always responsive — by phone or email.
Contact us today — call us on 020 4522 9740 or email hello@esdgaccountancy.com.
