Introduction – A New Era for Sole Traders
For years, sole traders have enjoyed relatively straightforward tax reporting: one annual Self Assessment return, a bit of bookkeeping, and a January deadline to aim for. But those days are numbered.
From April 2026, the Government’s Making Tax Digital for Income Tax Self Assessment (MTDITSA) rules will change how more than four million sole traders and landlords manage their tax affairs.
Instead of one return, business owners will have to send quarterly updates, an End of Period Statement, and a Final Declaration. That’s six submissions per year.
For many, this is more than just a change in process – it’s a major shift in how they run their businesses. And for some, it’s the push they need to consider whether incorporation into a limited company might actually make life easier.
Let’s unpack what MTDITSA means, the challenges it creates, and why going limited could be a smarter move than you might think.
What Exactly Is MTDITSA?
MTDITSA is part of HMRC’s wider Making Tax Digital programme, designed to modernise the UK’s tax system.
Here’s how it works:
- Who it applies to: Sole traders and landlords with annual income above £30,000.
- When it starts: April 2026.
- What’s required:
- Quarterly submissions of income and expenses.
- An End of Period Statement (EOPS) to finalise the year’s figures.
- A Final Declaration to confirm all personal income, including non-business sources.
The goal, according to HMRC, is to reduce errors and improve the accuracy of tax collection. But for small business owners, the reality is more admin, more deadlines, and more pressure.
How MTDITSA Will Impact Sole Traders
Right now, as a sole trader, you probably:
- Keep records in a spreadsheet or simple bookkeeping tool.
- Submit one Self Assessment return each January.
- Pay your tax bill once or twice a year.
Under MTDITSA, you’ll need to:
- Use approved software – no more paper records or Excel spreadsheets.
- Update quarterly – report income and expenses every three months.
- Stay on top of bookkeeping year-round – leaving it all until January won’t work anymore.
- File additional statements – the EOPS and Final Declaration add complexity.
This isn’t just a one-off learning curve – it’s an ongoing commitment.
And if you miss a deadline? Penalties and interest charges are waiting.
The Hidden Costs of MTDITSA for Sole Traders
On the surface, it might just look like “a bit more admin.” But let’s break down the real-world impact.
1. Extra Time
Quarterly reporting means bookkeeping can’t be pushed to the back burner. Every receipt, invoice, and bank transaction needs to be up to date within weeks, not months.
2. Software Subscriptions
Approved tools like Xero, QuickBooks, or FreeAgent all come with monthly costs. Sole traders who used to get by on spreadsheets will see this as a new expense.
3. Penalty Risk
Six submissions a year means six opportunities for missed deadlines or errors. Even if the penalties are “light” in the early years, HMRC won’t stay lenient forever.
4. Distraction from Business
Time spent reconciling transactions is time not spent winning clients, delivering jobs, or growing revenue.
5. Professional Fees
Many sole traders will end up hiring accountants just to keep up – but often too late, when fines have already landed.
When you add these up, the supposed simplicity of staying a sole trader starts to look far less attractive.
Why Limited Companies Are Better Positioned
Here’s the interesting part: limited companies are already living in a digital compliance world.
- They file annual accounts with Companies House.
- They submit a Corporation Tax return each year.
- Many already use cloud accounting software as standard.
For a director of a limited company, quarterly reviews with an accountant aren’t unusual – they’re part of good financial management.
So when MTDITSA raises the bar for sole traders, it effectively levels the playing field. Suddenly, being limited doesn’t look like “more hassle” – in fact, it can be easier and more structured.
Tax Efficiency – A Key Incentive
MTDITSA isn’t the only reason sole traders are reconsidering their setup. The tax position is another major driver.
As a sole trader, your profits are taxed as income:
- 20% basic rate (up to £50,270).
- 40% higher rate (from £50,271 to £125,140).
- 45% additional rate (over £125,140).
- Plus Class 2 and Class 4 National Insurance.
As a director of a limited company, you can:
- Take a modest salary (keeping NICs low).
- Draw dividends taxed at 8.75% (basic rate) or 33.75% (higher rate).
- Leave profits in the business, taxed at 19–25%, instead of paying higher-rate income tax.
- Make pension contributions directly from the company, reducing taxable profits.
The flexibility is night and day. And once MTDITSA forces sole traders to do more admin anyway, the argument for staying put becomes weaker.
Case Study: Sarah the Online Retailer
Sarah runs an online shop selling handmade home décor. She brings in £45,000 a year as a sole trader.
Today:
- One tax return in January.
- Income tax and NI of around £8,000.
- Bookkeeping on a spreadsheet.
From April 2026:
- She’ll need Xero or similar (£30/month = £360/year).
- She’ll spend a couple of hours a week keeping books up to date.
- She’ll file six submissions a year, risking late penalties if she misses any.
If she incorporates:
- She can pay herself £12,570 salary, then take dividends.
- Her overall tax bill could fall by £1,000–£2,000.
- The company pays for the software and other expenses.
- Compliance is handled by her accountant, who already manages limited company deadlines.
For Sarah, going limited isn’t just about saving money – it’s about avoiding a world of stress under MTDITSA.
How Accounting Matters Supports MTDITSA
At Accounting Matters, we’ve been preparing for these changes for years. Our approach is to make digital compliance not just manageable, but actually useful for business owners.
Here’s what we offer:
- Early adoption of tools – we get you set up on Xero, Dext, and Hubdoc so your records are digital and seamless.
- Quarterly reviews – we don’t just tick HMRC boxes, we use your data to plan ahead for tax bills.
- Hands-on training – no jargon, no overwhelm. We show you exactly how to use the software for your business.
- Penalty protection – with us handling submissions, you don’t have to worry about missed deadlines.
- Future-proofing – we look at whether incorporation is the right move for you now, not just when the penalties start piling up.
Our clients often say the peace of mind is worth more than the tax savings. And when you combine both? It’s a win-win.
Why Accounting Matters Is the Right Partner for Incorporation
If you’re thinking about going limited, this isn’t something you should DIY. There are steps to get right:
- Registering with Companies House.
- Informing HMRC.
- Moving over bank accounts, contracts, and assets.
- Setting up payroll for directors.
- Structuring salary and dividends correctly.
At Accounting Matters, we make the switch simple. We don’t just set up the company – we hold your hand through the transition, make sure your bookkeeping is up to scratch, and design a tax-efficient plan tailored to you.
One client told us recently:
“Accounting Matters took the stress away. They explained everything clearly, set up my limited company, and showed me how to use Xero. Now I feel in control rather than worrying about what HMRC might throw at me.”
That’s the service we aim for – friendly, professional, and proactive.
Conclusion – Don’t Let MTDITSA Catch You Out
MTDITSA is coming, whether sole traders like it or not. From April 2026, compliance will be more complex, more frequent, and less forgiving.
For some, that means adapting as a sole trader with new tools and habits. For others, it’s the moment to finally incorporate – gaining limited liability, tax flexibility, and a smoother compliance journey.
The good news? You don’t have to figure it out alone. At Accounting Matters, we help you weigh up your options, make the transition if it’s right for you, and stay ahead of the changes.
Ready to talk about MTDITSA or incorporation? Book a free discovery call with us today – let’s plan your next step together.