MTD is now live – is it better to switch to a limited company rather than remain as a sole trader?

The first mandatory quarterly update under Making Tax Digital for Income Tax Self Assessment (MTD ITSA) fell due on 7 August 2026, covering the period from 6 April to 5 July. For the roughly 864,000 sole traders and landlords with income over £50,000 now in scope, it marked the biggest change to personal tax reporting in a generation, and, for a significant number, the point at which “sort it out in January” stopped being an option. It’s also prompted a wave of interest in switching to a limited company. There’s no single answer to whether that’s the right move – it depends on profit level, business type, and, for landlords, the specifics of the portfolio – but it’s worth understanding what’s actually involved before treating MTD alone as the reason to incorporate.

A survey of 1,000 in-scope sole traders, conducted between 17 and 24 July 2026 and commissioned by filing platform Taxfix, found that 23% had already set up, or begun setting up, a limited company at least partly because of MTD. A further 57% said they had explored or considered incorporation for the same reason. Almost 45% said the reforms had made them consider leaving self-employment altogether and returning to salaried work.

We’ve heard similar questions come up in a number of client conversations recently. The instinct is understandable – limited companies currently sit outside MTD ITSA’s scope entirely, filing an annual CT600 instead of quarterly updates, so incorporating looks like a clean way out. The factors below are worth setting out before treating MTD alone as the reason to incorporate.

What MTD ITSA actually requires, and who it affects

MTD ITSA is mandatory from 6 April 2026 for sole traders and landlords with gross qualifying income – turnover before expenses, not profit – over £50,000, based on the 2024/25 tax year. The threshold drops to £30,000 from April 2027 and £20,000 from April 2028, which brings a much wider population of smaller sole traders and landlords into scope over the next two years.

In scope, taxpayers must keep digital records and submit four quarterly updates per income source, followed by a final declaration that replaces the traditional Self Assessment return. Landlords with property and self-employment income need to do this separately for each. HMRC is running a “soft landing” for this first cohort, waiving penalty points for late submission of the first four quarterly updates – but that’s a temporary concession for 2026/27 only, not a long-term feature of the regime.

What incorporation into a limited company changes, and what it doesn’t

Moving from sole trader to limited company status genuinely does take a business out of MTD ITSA’s scope. What it doesn’t automatically do is remove the underlying compliance and cost picture – it changes its shape, and whether that shape is an improvement depends on individual circumstances.

Some of the factors that typically come into that calculation:

Corporation tax and the second layer of tax on extraction. Profits inside a company are taxed at 19% to 25% depending on level, which can look attractive next to income tax rates. But taking that money out as salary or dividends creates a second layer of personal tax, and the combined position doesn’t automatically beat staying as a sole trader – it depends heavily on profit level and how much of the money the owner actually needs to draw out.

A different, not necessarily smaller, compliance burden. A limited company still has to file annual accounts and a corporation tax return, alongside Companies House obligations including confirmation statements and, in time, MTD for Corporation Tax once that stage of the programme is confirmed. For a sole trader whose main concern with MTD ITSA is admin, incorporating can mean trading one reporting cycle for another rather than reducing reporting overall.

Landlords face additional considerations, some of them largely irreversible. MTD ITSA’s rollout for landlords specifically was covered in an earlier piece, and the incorporation trade-offs sit on top of that. Transferring an existing property portfolio into a company is treated as a disposal for Capital Gains Tax purposes, and Stamp Duty Land Tax can apply on top of whatever was paid on the original purchase. Buy-to-let lenders generally require refinancing onto a specialist company mortgage, with a fresh application and often an accountant’s certificate to support it. Once inside a company structure, landlords whose property values rise past £500,000 can also fall into Annual Tax on Enveloped Dwellings reporting, which carries its own filing obligations and penalties if missed. Set against all of that, a company can deduct 100% of mortgage interest rather than being restricted to the 20% basic rate credit that applies to individual landlords under the Section 24 rules – which is why incorporation works out differently across different portfolios, and why the numbers tend to matter more than the general principle.

The decision is largely one-way. Once a business or portfolio has incorporated, unwinding that structure typically triggers its own tax consequences. That’s worth factoring in before a quarterly filing deadline becomes the deciding factor behind a structural decision that outlasts it.

Two separate decisions, not one

MTD ITSA compliance and the incorporation question are often conflated, but they sit on different timelines and involve different considerations:

• MTD ITSA compliance is now a fixed requirement for anyone over the relevant threshold, regardless of business structure, and the current soft-landing period offers a window to build a working quarterly rhythm before penalties apply from 2027/28.
• Incorporation is a structural and largely permanent choice whose value depends on profit level, how much is drawn out personally, and – for landlords – the transfer costs weighed against any long-term saving on mortgage interest treatment. That calculation is specific to each business and each portfolio, and the two decisions don’t have to be made together or on the same timescale.

How UHY Williamson Croft can help

We support sole traders and landlords with MTD ITSA compliance directly – helping put the right digital record-keeping and software in place and managing quarterly submissions. For anyone weighing up incorporation, we can model what a limited company structure would mean for a particular business or portfolio, including the Companies House and ongoing compliance side, so the numbers – rather than the filing deadline – are what informs the decision.

If MTD ITSA or the incorporation question is something you’re working through, contact Taylor Rogers, Partner, to talk through the options.

This article is provided for general information purposes only and does not constitute advice. Every business and personal tax position is different, and the factors set out above will not all apply, or apply equally, in every case. We would recommend seeking advice from a qualified accountant or tax adviser before acting, or refraining from acting, on anything contained in this article.