Making Tax Digital and Incorporation: Everything You Need to Know about the 2026 Changes

One thing about the world of tax is that it's an ever evolving landscape. One major initiative that's been on the horizon for some time but is now coming closer and closer is Making Tax Digital. Now in this week's I Hate Numbers podcast, I'm going to be giving you two for the price of one. I'm going to be talking about

Making Tax Digital. I'm going to abbreviate that to MTD, and I'm also going to be discussing the topic of incorporation. For some people, this could be a trigger point as to whether they become a company or not, and I'm going to explore that in this week's podcast. I'm also going to be talking about what exactly MTD is, who needs to comply,

the situation with companies, should you incorporate and intersperse will throw a few numbers in to make it easier to assimilate. Let's crack on.

It's not a, oh, I might join it - is, you have no choice. It's compulsory. Now, that's going to be a significant shift for a number of people there, and it's really crucial that we do what we can to get ready and prepare. How you report your income is about to change. The fundamental rules for tax calculations aren't changing.

It's just how you inform our friends at HMRC. Now, MTD, by the way, was originally due to become mandatory from April 24. And the timetable for compulsory compliance was revised in December 22, and it's as follows. Now from April 26, the 6th if you ought to be precise, anyone with gross annual income of over 50,000 from self-employment and property letting has to be part of the scheme.

Now, that's going to raise the question of should you carry on as a sole trader? MTD does not apply to companies at the moment. Should you be a sole trader? Should you carry on or should you actually incorporate your business? Could becoming a limited company actually delay your need to comply with MTD? And it's an excellent question, and I'm going to be breaking that down in more detail through this podcast.

Now what I will say, never make a decision just purely for tax reasons here. There's going to be some underlying sense commerciality behind it as well. So let's start off with what exactly MTD is now. MTD is making tax digital. Think of it as HMRC - its grand plan to bring tax into the 21st century. Now their objective, their goal is to move tax reporting to a digital basis, make it consistently, ultimately easier to manage, identify any errors more easily, and plug any gaps there will be in the tax coffers.

Now the biggest change that people will have to get their head round is instead of filing one tax return a year, you'll be submitting updates on a quarterly basis. That's right, four times a year. Unfortunately, you won't be able to just use paper records. You'll have to use what's called MTD compatible software to record all your income and your expenses digitally.

Effectively, the self-assessment return, if you file paper or online, is going to eventually disappear under MTD. To replace it, there'll be four quarterly updates followed by a final declaration at the end of the tax year. Now this is going to have a major shift about not only how you manage your taxes from day to day, but the record keeping and the update in process and procedure.

Now, if it's running through your mind about, oh my gosh, how do I choose the right software? Don’t worry. Check out the notes. We've got some guidance on our website ihatenumbers.co.uk to help you navigate that. As a spoiler alert, by the way, we recommend people move to something like Xero, for which we are platinum partners.

Cough. Cough. Let's move on now. Who needs to comply with MTD? Well, from April 26, let's be very clear, if you're a self-employed business owner, income of over 50,000 landlords, those with rental income and any individuals owning over 20,000 of these sources, you are going to fall into this category and you need, and that's compulsory to register for MTD and start submitting those quarterly updates.

Now, as a word of caution, as likely most things in tax, if you miss a deadline, it's likely to trigger a penalty inclusion. So staying on top of this is absolutely key. HMRC may allow some light touch, but the movement of them in recent times has been, there's a penalty regime there, a penalty scoring system.

You're going to be part of that. Now, HMRC will be contacting you if you're falling under these rules. We are notifying our own clients, by the way, internally. But either way, be aware whether it's going to apply to you. And you don't panic when it arrives. Don't ignore those letters. It doesn't mean, you are in trouble.

HMRC, in terms of writing letters doesn't tend to be very client friendly here. They're very efficient there, so it's quite easy to get into a panic, but they're trying to tell you it is time to get yourself prepared. Now, if you've got access to your accountant, talk to them about it. If you don't have anyone helping you, by all means drop us a line at I Hate Numbers.

Obviously we don't hate numbers, by the way, but we know many of our clients do. Remember, you're not alone in this here, so don't panic and don't stress. And what about companies? Now, if you are currently running a limited company, here's the good news for now, at least. The government has not yet confirmed when MTD will apply to corporation tax.

So currently limited companies are expected and required to follow the MT2 rules for their own business tax. Now the question that comes about naturally is, will becoming a company actually help you avoid or at least delay the need to comply with the MTD? So the question is, should you incorporate to avoid MTD?

Now, I'm hearing this question a lot from people. I'm seeing it online and on the surface it can seem very tempting. Companies don't yet need to follow the rules. They still find their incorporated tax returns annually, not quarterly. So yes, incorporating could buy you some time, and this is a but and it's a big, but. You've got to ask yourself, does it actually make sense for you in the long term for your specific business?

Now, historically, becoming a company meant that you'd have significant tax savings. That's still true to some extent, but it's not as true as it once was. Certainly the tax benefits of incorporation have shrunk, and depending on how much profit your business earns and how much that profit you withdraw for yourself, you may find that the savings are quite marginal between sole trader and company.

And as a sweet spot circa 20-25,000 pounds a year worth of profits is normally the tipping point to become a company. And more importantly, becoming a company does bring responsibilities and admin that if you are self-employed, you are not used to, you've got the requirements and register with Companies House and file the accounts.

There a confirmation statement running a payroll system, which is advisable, submitting tax returns both personally and for the company. And then you'll need to pay corporation tax as well as potentially income tax as well. Now that might seem quite scary, but just bear in mind there are extra obligations and it also means that the discipline of running a company is going to be different to running your sole trader business.

And there's normally an additional uplift in terms of fees that you paid your advisor. Now, if you miss a deadline with a limited company, you're going to be looking at fines and penalties just as you would with self-assessment. So incorporation in itself isn't a shortcut to avoid your tax responsibilities. It is, and it should always be a strategic business decision.

And me, I always apply that philosophy of substance follows form. Think about your business now, think about your business over the next, say two or three years. Think about your objectives. Think about how you are operating, think about risk and everything else that goes with that, and then make the decision of the best way to structure it.

Becoming a company is a strategic business decision, and it's based on the genuine needs and goals of your business, not just a way to delay a tax change. Do check out the resources on the I Hate Numbers website to find out more. Now, let's look at the admin and compliance side of things. Now, MTD will increase admin for self-employed people.

You can't get around that. Quarterly updates means more regular deadlines, and yes, some additional software costs. Now my personal view would be subscribing to something like Xero, a software platform, which we are proficient in and expert in in terms of setting up for clients, means there's actually a spinoff.

You get to know what's going on in your business. You become closer to your numbers. You get to know what your tax liabilities are as you go through. Yes, there is going to be additional time involved in doing this, but if you get into a routine, you're going to avoid that annual once a year, getting all your paperwork together and getting things updated.

Limited companies do have admin just slightly differently. If you do register for payroll, for example, you're going to have a payroll scheme to operate, national insurance contributions for directors and employees, and if your turnover is a sufficient level, VAT and corporation tanks as well. So you've got to ask yourself,

are you comfortable taking on those extra responsibilities or outsourcing that to an accountant if you don't have one already? Or do you prefer to deal with those quarterly returns of running a company? So it is a weigh up exercise. Now, what's the impact on costs? Now, if you are staying self-employed and you operate the MTD, you obviously need to subscribe in the

MTD software. You need to keep digital records of your income and expenses. You need to submit those four updates a year, which means ongoing time and effort. There are ways to actually keep that process smooth and for those clients of ours that embrace digital accounting here, the actual ongoing, doing things on a regular basis, which is good discipline, means that actually the task is not as erroneous as it might feel.

You can plug your bank accounts into your software. The record keeping can be light touch, and there are a number of tools out there that actually make that data capture, that record keeping, not as erroneous as you might think. Now if you've become a limited company, you've obviously got the cost of incorporation, the annual confirmation statement, running the payroll, additional fees, digital tools and accounting support.

The tax rules are different, so it's no longer you anymore. You are creating a different legal beast. So the ways where you might, for example, pay for something personally and have mixed use of business and personal, those rules don't necessarily apply when you become a company. So what's the bottom line?

Incorporating your business may indeed delay your MTD requirements for income tax, but there are additional responsibilities and admin burdens and potential costs. There's no such thing as a one-size-fits-all answer. There are many benefits I feel still for becoming a company. Doesn't suit every business, but for some it's ideal.

Again, it depends on your personal circumstances as well. If your business is a side hustle, then going as a limited company makes sense. The key thing is make an informed decision or certainly tap into some advice. Be willing to invest in that advice to actually help you make that final decision. Our diary is always free.

If you don't have access to that existing support, then give us a shout. Now, folks, I hope you found this podcast episode useful. If you have, let me know what you think. Share it with those who you feel would benefit from that. Subscribe. Check out the website for resources. Until next week, happy MTDing.