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.
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.