If you own a marketing agency, a digital agency, or any other type of agency in the UK, you have probably already dealt with Making Tax Digital for VAT. That is MTD VAT. It has been mandatory for VAT-registered businesses since 2019, and by now most agency founders have their VAT returns filed through compatible software like Xero, QuickBooks, or FreeAgent.
But there is a second wave coming. Making Tax Digital for Income Tax Self Assessment, or MTD ITSA, starts from April 2026. This one applies to you even if you are not VAT-registered. It changes how you report your personal tax as a company director or sole trader.
This article explains the MTD VAT vs MTD ITSA agency founder difference in plain English. You will know exactly which rules apply to you, when they take effect, and what you need to do to stay compliant.
What Is MTD VAT?
Making Tax Digital for VAT requires all VAT-registered businesses to keep digital records and file VAT returns using HMRC-compatible software. You cannot log into the HMRC portal and type numbers into a web form anymore. The software must connect directly to HMRC's systems through an API.
For agency founders, this has been standard practice for years. If your agency is VAT-registered and you use Xero, QuickBooks, or FreeAgent, you are already compliant. Your software pulls the transaction data, calculates the VAT, and submits the return.
The key point: MTD VAT applies to the business entity. Your limited company files the VAT return. You as an individual are not directly involved in the filing process beyond approving the numbers.
What Is MTD ITSA?
Making Tax Digital for Income Tax Self Assessment is different. It applies to you as an individual, not your company. It requires you to keep digital records of your personal income and file quarterly updates to HMRC, plus an end-of-year final declaration.
MTD ITSA starts in April 2026 for sole traders and landlords with qualifying income over £50,000 per year. It extends to those earning over £30,000 from April 2027.
For agency founders who are company directors, this is where it gets interesting. Your personal income includes your salary and dividends from the agency. If your total personal income from all sources exceeds £50,000, you will need to comply with MTD ITSA from April 2026.
That is the core MTD VAT vs MTD ITSA agency founder distinction: one applies to your business's VAT, the other applies to your personal tax return.
Key Differences Between MTD VAT and MTD ITSA
Let me lay out the differences clearly with a comparison you can refer back to.
Who Must Comply
MTD VAT: Any VAT-registered business, regardless of turnover. If your agency's taxable turnover exceeds £90,000, you must register for VAT and comply with MTD VAT. Some agencies register voluntarily below that threshold.
MTD ITSA: Individuals with qualifying self-assessment income over £50,000 (from April 2026) or £30,000 (from April 2027). Company directors are included if their personal income from dividends, salary, and other sources exceeds these thresholds.
What You Must File
MTD VAT: One VAT return per quarter (or monthly if you choose). That is it. No quarterly updates, no end-of-year statement beyond the normal VAT return.
MTD ITSA: Four quarterly updates during the tax year, plus an end-of-year final declaration. Each quarterly update summarises your income and expenses for that period. The final declaration replaces the current self-assessment tax return.
Digital Record-Keeping Requirements
MTD VAT: You must keep digital records of all VAT transactions. Most accounting software handles this automatically. You can still keep paper receipts and invoices, but the summary data must be in a digital format.
MTD ITSA: You must keep digital records of all income and expenses relevant to your self-assessment. For agency founders, this means tracking your salary, dividends, bank interest, and any other personal income. You also need to record deductible expenses if you have any.
Software Compatibility
MTD VAT: Compatible with Xero, QuickBooks, FreeAgent, Sage, and most other accounting platforms. These have been MTD-compatible for years.
MTD ITSA: Requires compatible software for personal tax. HMRC has a list of approved software providers. Some accounting platforms are adding MTD ITSA functionality. You may need separate software if your current platform does not support personal tax filing.
Penalties for Non-Compliance
MTD VAT: Late filing penalties apply. HMRC uses a points-based system. You get one point for each late submission. Reach a threshold of points and you face a £200 penalty. Further late submissions add more penalties.
MTD ITSA: A new penalty system starts alongside MTD ITSA. Late quarterly updates incur points. Late payment of tax incurs interest plus penalties starting at 2% of the amount owed. The system is designed to catch problems earlier than the current annual return system.
What This Means for Agency Founders
Most agency founders reading this will already be compliant with MTD VAT. Your accountant or your in-house finance person handles the quarterly VAT returns through your accounting software.
The new challenge is MTD ITSA. If you are a company director drawing a salary of £12,570 and taking dividends of £40,000 or more, your total personal income likely exceeds £50,000. That means MTD ITSA applies to you from April 2026.
You will need to submit quarterly updates to HMRC showing your personal income. Your accountant can handle this, but you need to provide the data in a timely way. You cannot wait until the January deadline anymore.
Practical Steps to Prepare
Here is what you should do now, not in March 2026.
Check Your Personal Income
Look at your total personal income for the last tax year. Add your salary, dividends, bank interest, and any other income. If the total exceeds £50,000, you are in scope for MTD ITSA from April 2026.
If it falls between £30,000 and £50,000, you are in scope from April 2027. If it is under £30,000, you are not required to comply, though you can volunteer.
Talk to Your Accountant
If you work with an ICAEW-qualified firm like Agency Founder Finance, your accountant will already be planning for this. Ask them specifically: "Am I in scope for MTD ITSA, and what software will we use?"
Your accountant can set up the digital record-keeping and software integration now, so you are not scrambling in early 2026.
Review Your Software
Your current accounting software may or may not support MTD ITSA. Xero and QuickBooks are both developing MTD ITSA functionality. FreeAgent already supports it for sole traders. Check with your provider.
If your software does not support MTD ITSA, you may need a separate tool for personal tax filing. Your accountant can recommend one.
Get Your Personal Records in Order
This is the part most agency founders overlook. Your company records are probably in good shape because you file VAT returns quarterly. Your personal records might be a different story.
Start keeping a digital record of all personal income sources now. That means dividend vouchers, P60s from your salary, bank interest statements, and any other income documentation. Store them in a digital format your accountant can access.
What Stays the Same
Not everything changes. Your corporation tax return (CT600) is not affected by MTD ITSA. Your company's VAT returns continue as before under MTD VAT. Your payroll reporting (RTI) remains unchanged.
The annual self-assessment tax return is being replaced by the quarterly updates plus final declaration, but the underlying tax calculations do not change. You still pay income tax on your salary and dividends at the same rates. The dividend allowance remains £500 for 2025/26. The personal allowance stays at £12,570.
What changes is the timing and frequency of reporting. Instead of one annual return due by 31 January, you will file four quarterly updates and one final declaration. Your tax payments are still due by 31 January and 31 July, though HMRC is consulting on whether to change payment dates.
A Real Example
Let me give you a concrete example so you can see how this applies.
Sarah runs a 15-person digital agency in Manchester's Northern Quarter. Her limited company turns over £1.2 million per year. She pays herself a salary of £12,570 and takes dividends of £60,000. Her total personal income is £72,570.
Sarah's agency is VAT-registered and files MTD VAT returns quarterly through Xero. That is already handled.
From April 2026, Sarah must also comply with MTD ITSA. Her accountant will file quarterly updates showing her salary and dividend income. The accountant will use software that connects to HMRC's systems. Sarah needs to provide her dividend vouchers and P60 promptly each quarter.
If Sarah ignores this, she faces late filing penalties and interest on any underpaid tax. The quarterly system means HMRC will spot gaps sooner than under the old annual system.
Common Questions Agency Founders Ask
I hear variations of these questions regularly from clients. Here are the answers.
Do I need to do both MTD VAT and MTD ITSA?
Yes, if you are a VAT-registered agency founder with personal income over £50,000. They are separate obligations. MTD VAT applies to your company's VAT returns. MTD ITSA applies to your personal tax. You must comply with both.
Can my accountant handle MTD ITSA for me?
Yes, in most cases. Your accountant can file the quarterly updates on your behalf, provided they have access to your digital records. You still need to provide the underlying data. Your accountant cannot guess your dividend income for the quarter.
What if my personal income fluctuates?
HMRC looks at your income on a tax-year basis. If your income drops below £50,000 in a particular year, you may fall out of scope for that year. But if it is consistently above £50,000, you are in scope. Your accountant can advise on your specific situation.
Does MTD ITSA affect my company's tax?
No. MTD ITSA affects your personal tax return only. Your company's corporation tax, VAT, and payroll are separate obligations. The MTD VAT vs MTD ITSA agency founder distinction is important here: they are different systems for different taxes.
What Happens If You Ignore MTD ITSA
HMRC is serious about Making Tax Digital. The MTD VAT rollout was phased, but penalties applied from the start. MTD ITSA will follow the same pattern.
If you do not file your quarterly updates on time, you accumulate penalty points. Reach the threshold and you face a £200 penalty. Further late submissions add more penalties. Interest accrues on any underpaid tax from the original due date.
More importantly, the quarterly system gives HMRC real-time visibility of your income. If your dividend income spikes in one quarter, HMRC will know about it within weeks, not months. That means any underpayment of tax is identified sooner, and the interest clock starts ticking earlier.
Final Thoughts
The MTD VAT vs MTD ITSA agency founder difference comes down to this: MTD VAT is about your business's VAT. MTD ITSA is about your personal tax. Both require digital record-keeping and compatible software. Both are mandatory. But they apply to different entities and have different filing schedules.
If you are already filing MTD VAT returns through Xero or QuickBooks, you are ahead of the game. You understand the digital record-keeping requirement. MTD ITSA extends that same principle to your personal finances.
Start preparing now. Check your personal income against the £50,000 threshold. Talk to your accountant about software compatibility. Get your personal records organised. April 2026 will arrive faster than you expect.
If you want to discuss how MTD ITSA affects your specific situation, get in touch with our ICAEW-qualified team. We work exclusively with agency founders and we are already preparing our clients for the transition.