Making Tax Digital for Income Tax: what it means for contractors
Direct Answer
Making Tax Digital for Income Tax Self Assessment (MTD ITSA) replaces the annual Self Assessment return with digital record-keeping, four quarterly updates, and a final declaration — but only for sole-trade and property (rental) income. Your limited company's profits, salary and dividends are not in scope. So if you contract purely through a limited company, MTD ITSA generally doesn't affect you. It only bites if you also have self-employment or rental income above the qualifying-income threshold, which is being phased in from £50,000 (6 April 2026), then £30,000 (6 April 2027) and £20,000 (6 April 2028).
The key point for limited company contractors
There's a lot of noise about MTD, and most of it doesn't apply to you if you contract through a limited company. Here's the distinction that matters:
- MTD for VAT — already applies to your VAT-registered company. You're almost certainly compliant already (returns filed from MTD software).
- MTD for Income Tax (ITSA) — applies to individuals with sole-trade or property income. It does not cover limited company profits, your director's salary, or dividends.
- MTD for Corporation Tax — not yet in force; still at proposal/consultation stage.
If your only income is salary and dividends from your own limited company, MTD ITSA does not currently apply to you — you continue with a normal Self Assessment return. It becomes relevant the moment you add sole-trade or rental income above the threshold.
Who it applies to, and when
MTD ITSA is being introduced in phases based on your qualifying income — your gross (pre-expenses) sole-trade income plus gross property income, taken from your most recent finalised Self Assessment.
| Qualifying income | MTD ITSA applies from | Tested on |
|---|---|---|
| Over £50,000 | 6 April 2026 | 2024/25 return |
| Over £30,000 | 6 April 2027 | 2025/26 return |
| Over £20,000 | 6 April 2028 | 2026/27 return |
| £20,000 or under | Not yet in scope | — |
Note it's the gross figure that counts, not your profit — a contractor with a £45,000-turnover property portfolio and a modest side-trade could cross £50,000 combined even if the net income is small. And HMRC tests your income against an earlier year's return (shown above), so you can be mandated based on income you earned two years before the start date.
Once you're in, you're in for a while. After you're mandated, you stay in MTD ITSA for a minimum of 3 consecutive tax years. Leaving requires your qualifying income to be £20,000 or under for 3 preceding years — a dip for a single year doesn't take you back out.
What actually changes vs current Self Assessment
| Now (Self Assessment) | Under MTD ITSA | |
|---|---|---|
| Record keeping | Any method, incl. spreadsheets/paper | Digital records in compatible software |
| Submissions per year | One return | Four quarterly updates + one final declaration |
| Deadline | 31 January | Quarterly deadlines through the year, plus final declaration |
| Tax payment | 31 Jan / 31 Jul (payments on account) | Unchanged for now — quarterly updates don't trigger payments |
What a "quarterly update" is — and isn't
Each quarter you send HMRC a cumulative summary of income and expenses for your sole-trade or property business, straight from MTD-compatible software. It is not four mini tax returns — no tax is calculated or paid on a quarterly update. At year-end, a final declaration pulls everything together (including non-MTD income like your company dividends) and replaces the old return.
The standard quarterly-update deadlines are one calendar month and two days after each quarter end:
| Quarter | Update deadline |
|---|---|
| 6 Apr – 5 Jul | 7 August |
| 6 Jul – 5 Oct | 7 November |
| 6 Oct – 5 Jan | 7 February |
| 6 Jan – 5 Apr | 7 May |
The final declaration is due by the following 31 January — the same date as the old Self Assessment deadline.
The penalty regime
MTD ITSA uses a points-based penalty model for late submissions: each missed submission deadline earns a point, and once you hit the points threshold for your submission frequency a fixed penalty is charged, with further penalties for continued defaults. Late payment of tax is penalised separately under the late-payment rules. Failing to keep digital records can carry a penalty of up to £3,000.
Don't over-rely on the first-year "soft landing". The soft landing in the first year covers only late quarterly-update points. It does not cover a late final declaration, late payment of tax, or the £3,000 record-keeping penalty — those apply from day one.
The practical risk for anyone new to MTD is simply the increase in touchpoints — four submissions instead of one means four chances to miss a deadline. Good software and an accountant handling the submissions removes that risk.
What contractors should do
- Company-only income? No action needed for MTD ITSA — carry on with normal Self Assessment.
- Have rental or side-trade income? Check your gross qualifying income against the threshold for the coming tax year, and get onto compatible software before your start date.
- Not sure? The gross-income test catches people out — a growing property portfolio can tip you in. Have it checked.
AutoBooks handles your limited company end-to-end and your director's Self Assessment as standard; if you also have property or sole-trade income that brings you into MTD ITSA, we'll flag it and keep you compliant.
Not sure whether MTD for Income Tax affects you?
Autobooks handles your company accounts and your Self Assessment, and flags MTD ITSA if your other income brings you into scope — from £89+VAT/month.