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Does Making Tax Digital Affect Limited Company Contractors? Clearing Up the Confusion
Making Tax Digital for Income Tax (MTD ITSA) went live on 6 April 2026, and it’s caused widespread confusion among contractors. If you operate through a limited company and your only income is salary and dividends from your PSC, MTD does not apply to you. Your company already files Corporation Tax returns digitally — nothing changes. But if you also have rental income or self-employment income that pushes your qualifying income above £50,000, you’re in scope and need to start filing quarterly.
Check whether MTD affects you →
What MTD for Income Tax actually is
MTD ITSA replaces the annual Self Assessment tax return with quarterly digital submissions for certain types of income. You’ll use compatible software to keep digital records and send HMRC a summary of your income and expenses every quarter, followed by a final declaration at year-end.
It’s mandatory from 6 April 2026 for individuals with qualifying income over £50,000. The threshold drops in subsequent years:
| Tax year | Qualifying income threshold |
|---|---|
| 2026/27 | Over £50,000 |
| 2027/28 | Over £30,000 |
| 2028/29 | Over £20,000 |
“Qualifying income” means gross income from self-employment and/or property — not salary, dividends, or PAYE income.
Why it doesn’t affect most PSC contractors
Limited company directors who take salary and dividends are not self-employed for MTD purposes. Your company is a separate legal entity that files its own Corporation Tax return. Your personal Self Assessment includes your salary and dividends, but these are not “qualifying income” under MTD.
Your position hasn’t changed:
- Corporation Tax is filed annually via your accountant (already digital)
- PAYE is reported in real time through RTI (already digital)
- Self Assessment continues as before — the annual return isn’t going away for company directors
- No quarterly reporting is required for salary or dividend income
If your only income is from your PSC, you can stop reading here. MTD doesn’t apply to you this year, next year, or when the threshold drops to £20,000.
When MTD does catch you
There are three common scenarios where a PSC contractor falls into scope:
1. Buy-to-let property income
If you own rental property personally (not through a company) and the gross rental income exceeds £50,000, you’re in scope for MTD from April 2026. This is gross income — before mortgage interest, repairs, or any other deductions. If you have a portfolio generating £55,000 in rent but £30,000 in mortgage interest, your gross qualifying income is still £55,000 and MTD applies.
2. Side self-employment
If you do any self-employed work alongside your PSC — freelance consulting on the side, writing, tutoring — and your combined self-employment and property income exceeds £50,000, you’re in scope. This is less common for contractors but does catch those with a “side hustle” registered as a sole trader.
3. Combined self-employment and property
Qualifying income is the total of your self-employment and property income. If you have £30,000 in rental income and £25,000 in sole trader income, your qualifying income is £55,000 and you need to comply.
What doesn’t count
The following do not count toward the £50,000 qualifying income threshold:
- Salary from your PSC (or any employer)
- Dividends
- Pension income
- Savings interest
- Capital gains
- Child benefit or other benefits
The quarterly reporting calendar
If you are in scope, here’s what’s required for 2026/27:
| Quarter | Period covered | Submission deadline |
|---|---|---|
| Quarter 1 | 6 April – 5 July 2026 | 7 August 2026 |
| Quarter 2 | 6 July – 5 October 2026 | 7 November 2026 |
| Quarter 3 | 6 October – 5 January 2027 | 7 February 2027 |
| Quarter 4 | 6 January – 5 April 2027 | 7 May 2027 |
| Final declaration | Full year | 31 January 2028 |
Each quarterly update is a summary of income and expenses for that period — not a full tax return. The final declaration at year-end replaces the Self Assessment return and is where your actual tax liability is calculated.
HMRC’s penalty waiver for year one
HMRC has confirmed a soft landing for the first year. In 2026/27:
- No penalties for late quarterly updates, provided they’re submitted by the final declaration deadline (31 January 2028)
- No penalties for minor errors in quarterly updates
- Points-based penalty system applies from 2027/28 onwards — each late submission earns a penalty point, and four points trigger a £200 fine
This gives you a full year to get your processes right. But don’t leave it until January 2028 to start — the quarterly habit is easier to build if you begin from Quarter 1.
Compatible software
You need HMRC-recognised software that can submit MTD ITSA updates. The main options for contractors:
- FreeAgent — already popular with PSC contractors, MTD-compatible for self-employment and property income
- Xero — full MTD support, good if your accountant already uses it
- QuickBooks — MTD-compatible, straightforward property income tracking
- HMRC’s own free software — basic but functional for simple cases
If you already use FreeAgent or Xero for your PSC accounts, check whether your plan includes MTD ITSA reporting or if it’s a separate module. Some providers charge extra for it.
What about sole trader contractors?
If you contract as a sole trader (not through a limited company), MTD applies directly to your contracting income. At a £400/day rate (£92,800 gross), you’re well above the £50,000 threshold and must file quarterly from April 2026.
Sole traders should:
- Sign up for MTD ITSA through your HMRC online account or Government Gateway
- Choose compatible software and link it to HMRC
- Keep digital records from 6 April 2026 onwards — paper records need to be digitised
- Submit your first quarterly update by 7 August 2026
If you’re a sole trader earning over £50,000, the MTD Readiness tool will walk you through exactly what you need to do.
Should MTD make you reconsider your structure?
MTD alone shouldn’t drive your decision about whether to incorporate. The tax savings of a limited company at most day rates far outweigh the minor convenience of avoiding quarterly reporting. At £500/day, a limited company saves roughly £5,700 per year compared to sole trader status — that dwarfs any admin burden from MTD.
However, if you’re a sole trader earning close to the threshold and considering incorporation anyway, MTD is one more reason to make the move. Once you’re operating through a PSC, your contracting income is outside MTD scope entirely.
Compare your take-home across structures →
How is this calculated?
MTD for Income Tax was enacted under the Finance (No. 2) Act 2017 and subsequent statutory instruments. The qualifying income thresholds were confirmed in the Autumn Budget 2025. HMRC’s guidance on who is in scope is published at GOV.UK under “Making Tax Digital for Income Tax.” The quarterly reporting deadlines follow a standard pattern of one month and two days after each quarter-end.
Frequently asked questions
Does MTD apply to limited company directors?
Not for your company income. If your only taxable income is salary and dividends from your PSC, MTD for Income Tax does not apply to you. Your company already files Corporation Tax returns digitally. MTD ITSA only targets self-employment and property income above the qualifying threshold (£50,000 in 2026/27).
I have rental income of £40,000 — am I in scope?
Not in 2026/27, when the threshold is £50,000. But you’ll be in scope from April 2027 when it drops to £30,000. Start preparing now — get your rental records into compatible software so you’re ready. If you also have any self-employment income, add it to the £40,000 to check if you’ve already crossed the threshold.
Do dividends count toward the £50,000 MTD threshold?
No. Dividends are not “qualifying income” for MTD purposes. Only gross self-employment income and gross property income count. Your PSC salary doesn’t count either.
What happens if I miss a quarterly deadline?
In 2026/27, nothing — HMRC is waiving penalties for late quarterly submissions as long as you file by the final declaration deadline of 31 January 2028. From 2027/28, a points-based system applies: each late submission earns a point, and accumulating four points triggers a £200 penalty. Points expire after a period of compliance.
Can I use my existing accounting software?
Possibly. If you use FreeAgent, Xero, or QuickBooks, check whether your current plan supports MTD ITSA submissions. Some plans include it; others require an upgrade or add-on. HMRC maintains a list of recognised software on GOV.UK. Your accounting software must be able to submit quarterly updates directly to HMRC — spreadsheets alone are not sufficient unless bridged through compatible software.
Not sure whether MTD applies to your situation? Use our free MTD Readiness tool — it asks a few simple questions and tells you exactly what you need to do. Takes under a minute.