What Is Making Tax Digital and Why Does It Affect Agency Founders?

Making Tax Digital, or MTD, is HMRC's programme to move the UK tax system fully digital. It started with VAT in 2019. Now it is coming for income tax. If you run a marketing, digital, creative, or recruitment agency, and you file a Self Assessment tax return, MTD for Income Tax Self Assessment (MTD for ITSA) will change how you report your income and pay your tax.

The short version: instead of filing one annual tax return, you will send quarterly digital updates to HMRC using MTD-compatible software. You will also make payments on account more frequently. It is a fundamental shift in how the tax system works for the self-employed, sole traders, and partners. It is not optional.

As ICAEW qualified accountants working exclusively with agency founders, we have been tracking this programme closely. The rollout has been delayed twice already. But the current dates are firm. If your agency income is above the thresholds, you need to act before April 2026.

Who Does MTD for ITSA Apply To?

The rules are based on your total qualifying income from self-employment and property. For agency founders, that typically means your sole trader profits or your partnership share. It does not apply to limited company directors yet, though that is expected in a future phase.

Here are the thresholds for the first phase, starting April 2026:

  • Income over £50,000 per year: MTD for ITSA is mandatory from April 2026.
  • Income between £30,000 and £50,000: Mandatory from April 2027.
  • Income under £30,000: Voluntarily only. No current mandate date.

If you are a sole trader web designer turning over £65k, or a freelance PR consultant billing £80k, you are in scope from April 2026. If you are a partnership of two agency owners sharing £120k in profits, each partner with a £60k share is also in scope.

What about limited company directors? Not yet. MTD for Corporation Tax is expected but has no confirmed start date. If you pay yourself a small salary and dividends from your agency Ltd company, your personal tax is still handled through Self Assessment. But the company's corporation tax is a separate system. For now, directors of Ltd companies are not directly affected by MTD for ITSA unless they also have sole trader income above the threshold.

What Changes Under MTD for ITSA?

Four things change. They are significant. Let me walk through each one.

Quarterly Digital Updates Instead of One Annual Return

Instead of filing one Self Assessment tax return each January, you will send a quarterly summary of your income and expenses to HMRC through MTD-compatible software. These updates are due within one month of each quarter end. The quarters are standard tax quarters:

  • Quarter 1: 6 April to 5 July. Update due by 5 August.
  • Quarter 2: 6 July to 5 October. Update due by 5 November.
  • Quarter 3: 6 October to 5 January. Update due by 5 February.
  • Quarter 4: 6 January to 5 April. Update due by 5 May.

These are not final tax calculations. They are cumulative data submissions. At the end of the year, you submit an End of Period Statement (EOPS) which finalises your figures. You also submit a final declaration, which replaces the current Self Assessment return. The total number of submissions goes from one to six per year.

Digital Record Keeping

You must keep your business records digitally. That means no more paper receipts in a shoebox. No more Excel spreadsheets that you update once a year. You need MTD-compatible software that records your income and expenses as they happen, or at least within a reasonable time frame.

Most cloud accounting software is already MTD-compatible. Xero, QuickBooks, FreeAgent, Sage, and others have been certified. If you are already using one of these for your bookkeeping, you are ahead of the game. If you are still using spreadsheets or paper, you need to switch.

More Frequent Payments on Account

Under the current system, you pay your tax in two instalments: a payment on account on 31 January and another on 31 July. Under MTD for ITSA, you will make payments on account more frequently. The exact schedule is still being finalised, but HMRC has indicated that payments will align with the quarterly updates. You may be paying tax four times a year instead of two.

This is a cash flow consideration. If your agency has lumpy income, you need to plan for more frequent tax payments. Your accountant can help you model this.

No More Paper Self Assessment Returns

Once you are in MTD for ITSA, you cannot file a paper return. Everything is digital. If you have been filing your own return on paper, that option disappears. You must use software or an agent who uses software.

What Does This Mean for Agency Founders Specifically?

Agency income is often variable. You might have months where a big retainer client comes on board, and months where project work dries up. Quarterly updates mean HMRC sees your income in near real-time. That changes how you manage tax provisions.

If you are a sole trader agency founder billing £70k per year, you currently put money aside for tax as you go. Under MTD, you will be reporting your income every three months. If you have a strong Q1 and a weak Q2, HMRC will see that. Your payments on account may adjust more frequently, rather than being fixed at 50% of the previous year's liability.

For partnership agencies, each partner must file their own quarterly updates. The partnership itself must also file a separate partnership return digitally. This adds complexity. If you are in a two-person agency partnership, both of you need MTD-compatible software and both need to understand the process.

For agency founders who also have property income, that income is included in the same quarterly updates. You cannot separate them. All your self-employment and property income goes into one digital record.

Software Requirements and Costs

You need MTD-compatible software. Most cloud accounting packages already have this. If you are using Xero or FreeAgent for your agency bookkeeping, you are likely already compliant for the record-keeping side. But you also need software that can submit the quarterly updates directly to HMRC through their API.

The cost varies. Xero starts around £30 per month. FreeAgent is often included with some business bank accounts. QuickBooks is similar. There are also free options from HMRC, but they are basic. For an agency founder, paying for proper software is worth it. It saves time and reduces error risk.

One practical point: if you use an accountant, they will typically handle the submissions for you. You just need to keep your records up to date in the software. Your accountant logs in, reviews the data, and submits the quarterly update on your behalf. That is the model most agency founders will use.

Penalties for Non-Compliance

HMRC is introducing a new penalty system for MTD. It is based on points. You get a penalty point for each missed submission. Once you reach a certain number of points, you get a financial penalty. The points reset after a period of compliance.

For quarterly updates, you get one point per missed submission. After four points, you face a £200 penalty. Further points trigger higher penalties. For the End of Period Statement and final declaration, the penalty points are separate. Miss those and you get additional points.

This is not theoretical. HMRC has already applied this system to MTD for VAT. They are enforcing it. If you ignore MTD for ITSA, you will eventually get penalty notices.

When Should You Act?

If your agency income is over £50k, you should start preparing now. Here is a timeline:

  • Now to December 2025: Choose your MTD-compatible software. Set up your digital records. If you are still on paper or spreadsheets, migrate your data. Talk to your accountant about the transition.
  • January to March 2026: Run a dry run. Use your software to submit a test quarterly update. Make sure the process works before it becomes mandatory.
  • April 2026: First mandatory quarterly update for the period 6 April to 5 July 2026. Due by 5 August 2026.

If your income is between £30k and £50k, you have until April 2027. But there is no harm in starting early. The software costs the same whether you start now or later. Getting familiar with the process early reduces stress later.

If your income is under £30k, you can opt in voluntarily. Some agency founders choose to do this because it simplifies their record keeping. Others wait. There is no penalty for staying out until a mandate applies to you.

Common Questions Agency Founders Ask Us

We get variations of the same questions regularly. Here are the most common ones.

Does MTD for ITSA apply to my limited company agency?

Not yet. If you are a director of an agency Ltd company, your company's corporation tax is not in scope for MTD yet. However, if you have personal self-employment income above the threshold, your personal tax is in scope. Most agency directors pay themselves through salary and dividends, so their personal tax is already handled through PAYE and dividend tax. But if you also do freelance work on the side as a sole trader, that income is in scope.

Can I still use an accountant?

Yes. In fact, using an accountant is the smart play. Your accountant can handle the quarterly submissions for you. You just need to keep your records up to date. We do this for our agency clients already. It is part of our standard service.

What happens if I miss a quarterly deadline?

You get a penalty point. Four points trigger a £200 penalty. More points mean higher penalties. The system is designed to encourage compliance, not punish occasional mistakes. But habitual late filing will cost you.

Do I need to change my bookkeeping habits?

Probably yes. If you currently dump receipts in a folder and sort them out at year end, that approach will not work under MTD. You need to record income and expenses as they happen, or at least monthly. Using a tool like Dext to scan receipts directly into your accounting software makes this easy.

How Agency Founder Finance Can Help

We are ICAEW qualified accountants who work exclusively with agency founders. MTD for ITSA is a compliance change, but it is also an opportunity. Quarterly updates mean you see your financial position more frequently. That is useful for running your agency, not just for HMRC.

If you are a sole trader or partnership agency founder with income over £50k, we can help you choose the right software, set up your digital records, and handle the quarterly submissions. If you are a limited company director, we can advise on whether MTD affects you now or later.

We work with agencies across the UK, from Shoreditch to Manchester Northern Quarter to Bristol Harbourside. The rules are the same everywhere. The preparation is what varies based on your current systems.

If you want to discuss your specific situation, get in touch. We can run through your income profile, your current software setup, and what you need to do before April 2026.

MTD for ITSA is coming. It is not complicated if you prepare early. The agency founders who treat it as a prompt to get their financial systems in order will come out ahead.