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.