MTD ITSA Is Coming. Here Is How It Affects You.

If you run a marketing agency through a limited company but also take on freelance work directly, you have a mixed-income situation that most MTD ITSA guidance does not cover well. The standard articles talk about landlords or sole traders. They rarely address the agency founder who pays themselves through dividends and also files a self-assessment return for separate freelance earnings.

From April 2026, Making Tax Digital for Income Tax (MTD ITSA) will require anyone with self-employed or property income over £50,000 to keep digital records and submit quarterly updates to HMRC. This is not optional. It is a legal requirement, and the penalties for non-compliance start from day one.

For agency founders, the question is not whether MTD ITSA applies to your agency. It does not. Your agency is a limited company and pays corporation tax. But if you also have freelance income from other sources, that side of your financial life falls squarely under MTD ITSA. This article explains exactly how to handle that split.

Does MTD ITSA Apply to Your Agency or to You Personally?

This is the most common point of confusion. Let us be clear.

Your limited company is not subject to MTD ITSA. It already operates under Making Tax Digital for VAT if it is VAT-registered. But the new Income Tax rules apply to individuals, not companies. They apply to your personal self-assessment return.

If you earn freelance income outside your agency, that income goes on your personal tax return. And if that freelance income exceeds £50,000 in a tax year, you must comply with MTD ITSA for that part of your affairs.

Here is a real example. You run a 12-person digital agency billing £800k per year. You pay yourself a salary of £12,570 and dividends of £60,000. That is all company income, taxed through PAYE and dividend tax. No MTD ITSA requirement there.

But you also do freelance consulting for three clients directly, earning £55,000 per year. That is self-employed income. It goes on your SA100 self-assessment return. And because it is over £50,000, you must comply with MTD ITSA from April 2026.

The threshold is based on your gross self-employed income, not your profit. If your freelance earnings hit £51,000 but your costs are £40,000, you still qualify. It is the turnover figure that counts.

What If Your Freelance Income Is Below £50,000?

You are not required to comply yet. But HMRC has indicated that MTD ITSA will roll out to those earning over £30,000 from April 2027. If you are close to the threshold now, it makes sense to prepare early rather than scramble later.

Also, you can voluntarily join MTD ITSA early. Some founders do this because it forces better record-keeping. If you already use software like Xero or FreeAgent for your agency, adding MTD-compatible software for your freelance income is straightforward.

What MTD ITSA Actually Requires From You

The rules are straightforward but require a shift in how you manage your freelance finances.

First, digital record-keeping. You must keep digital records of all your freelance income and expenses. No more paper receipts in a shoebox. No more spreadsheets that you update once a year. Every transaction must be recorded digitally, and the records must be kept for at least five years.

Second, quarterly updates. Every three months, you must submit a summary of your freelance income and expenses to HMRC using MTD-compatible software. These are not full tax calculations. They are updates. HMRC uses them to build a real-time picture of your tax position.

Third, an end-of-year finalisation. After the tax year ends, you submit a final declaration that confirms your figures. This replaces the traditional self-assessment return for your freelance income, though you may still need to file a full return for other income sources.

Fourth, payment on account continues. MTD ITSA does not change when you pay tax. You still make payments on account on 31 January and 31 July, with any balancing payment due on 31 January following the year end.

What About Your Agency Dividends?

Your dividend income from the agency does not count as self-employed income for MTD purposes. Dividends are investment income. They are not subject to quarterly reporting. You still declare them on your annual self-assessment return, but they sit outside the MTD ITSA quarterly update process.

This is an important distinction. Your MTD-compatible software only needs to track your freelance income and expenses. Not your dividends. Not your salary. Not your bank interest. Just the self-employed part.

Which Software Should You Use?

HMRC maintains a list of MTD-compatible software. Not all accounting software qualifies. Here is what we recommend for agency founders with freelance income.

FreeAgent is a strong choice if you already use it for your agency. It is MTD-compatible and handles the quarterly submission process well. The downside is that it is designed for single entities, so you would need a separate FreeAgent account for your freelance income if your agency already uses it.

Xero also works, though you need to ensure you are on a plan that includes MTD ITSA functionality. Xero allows you to run multiple organisations under one login, which can help if you manage both your agency and freelance finances in one place.

QuickBooks has MTD ITSA support built into its self-employed plan. It is simpler than Xero or FreeAgent, which can be an advantage if your freelance income is relatively straightforward with few transactions.

Dext is worth considering for receipt capture. It integrates with most accounting platforms and automates the digital record-keeping requirement. If you hate manual data entry, Dext saves hours.

We recommend speaking to your accountant before choosing software. Not all platforms handle the mixed-income scenario well. As ICAEW qualified accountants, we help agency founders set up the right structure for both their agency and personal finances. You can contact us to discuss your specific situation.

How to Prepare Now, Before April 2026

You have time. But time runs out faster than you think. Here is a practical timeline.

Now to December 2025. Review your freelance income for the current tax year. If it is over £50,000, you are in scope. If it is between £30,000 and £50,000, you likely will be from April 2027. Start using digital record-keeping now, even if you are not yet required to. The habit is worth building.

January to March 2026. Choose your MTD-compatible software. Set it up. Run a test quarter. Submit a voluntary quarterly update to HMRC to check the process works. This is the time to iron out problems, not after the deadline.

April 2026 onwards. Your first mandatory quarterly update is due by 5 August 2026 for the period April to June. Missing this deadline triggers a penalty. HMRC has been clear that there will be no soft landing period for MTD ITSA.

Common Pitfalls for Agency Founders

We see three recurring issues with agency founders who have freelance income.

Mixing income streams. Your agency invoices and your freelance invoices must be kept separate. Use different bank accounts if possible. HMRC can and will ask for evidence that your freelance income is genuinely separate from your agency work. If the lines blur, you risk HMRC reclassifying freelance income as agency income, which creates corporation tax and dividend issues.

Underestimating the quarterly burden. Quarterly updates sound simple. They are not difficult, but they require discipline. You cannot file them six months late the way you might file a self-assessment return. The deadlines are fixed. Missing one means a penalty, and the penalties escalate with each missed quarter.

Forgetting about IR35. If your freelance work looks like employment to HMRC, you have an IR35 problem. The same rules apply to your freelance clients as apply to your agency's contractors. If you are doing freelance work that is effectively a disguised employment arrangement, you need to address that before MTD ITSA makes your income streams more visible to HMRC. Read our guide on IR35 for agency founders for more detail.

What Your Accountant Needs From You

Your accountant cannot do this for you entirely. MTD ITSA requires you to keep the digital records. But your accountant can handle the quarterly submissions if you provide the data on time.

Here is what you need to send your accountant each quarter:

  • Total freelance income for the quarter, broken down by client if possible
  • Total freelance expenses for the quarter, categorised (travel, software, subcontractors, etc.)
  • Copies of all invoices raised and receipts for expenses, stored digitally
  • Bank statements showing freelance transactions

If you use accounting software that integrates with your bank feed, most of this happens automatically. That is the point. Digital records mean the data flows in without you typing it up. But you still need to categorise transactions correctly. A freelance software subscription is a legitimate expense. A personal Netflix subscription is not.

What Happens If You Ignore MTD ITSA?

HMRC has invested heavily in MTD ITSA. They are not going to let it slide. The penalty regime is already in place:

  • First missed quarterly update: £200 fixed penalty
  • Subsequent missed updates: £200 each, plus daily penalties if you persist
  • Late final declaration: £200 fixed penalty, increasing with each month of delay
  • Interest on late payments: 7.5% per year (current rate, subject to change)

These penalties apply even if you owe no tax. Even if your freelance income is loss-making. The requirement is to submit the updates, not to owe tax.

If you are an agency founder with significant freelance income, ignoring MTD ITSA is not a viable strategy. The penalties add up quickly, and HMRC has the data to find you. Your self-assessment return already tells them your freelance income. They will cross-reference it against MTD ITSA compliance.

The Bottom Line for Agency Founders

MTD ITSA applies to your freelance income, not your agency income. If your freelance earnings exceed £50,000, you must comply from April 2026. If they are between £30,000 and £50,000, prepare for April 2027.

Set up digital record-keeping now. Choose MTD-compatible software. Keep your freelance and agency finances completely separate. And talk to your accountant about how this affects your overall tax position.

We work exclusively with agency founders at Agency Founder Finance. Our ICAEW qualified team understands the mixed-income scenario because we see it every day. If you want to review your position before the April 2026 deadline, get in touch.