Quick Answer
If you run a limited company and only draw salary and dividends, Making Tax Digital for Income Tax does not apply to you. The rules apply to individuals with qualifying self-employment or rental income over £50,000. Director remuneration and dividends are excluded.
What Is Making Tax Digital for Income Tax?
Making Tax Digital for Income Tax Self-Assessment (commonly called MTD for ITSA or MTD for Income Tax) is a new HMRC requirement that went live on 6 April 2026. Under it, certain individuals must use HMRC-recognised software to keep digital records and submit quarterly updates to HMRC. This replaces the annual Self-Assessment tax return for the income types it covers.
The rollout is phased by income level. From 6 April 2026, the rule applies to anyone whose qualifying income exceeds £50,000 per year. From 6 April 2027, the threshold drops to £30,000. From 6 April 2028, it falls further to £20,000. HMRC estimates approximately 780,000 sole traders and landlords are affected by the April 2026 wave, rising to around 1.75 million by April 2027 as the lower threshold draws in more landlords and freelancers.
The authoritative guidance is on GOV.UK: Find out if and when you need to use Making Tax Digital for Income Tax. For a full overview of MTD requirements and the quarterly submission workflow, the Making Tax Digital guide for UK agencies covers software setup and HMRC deadlines in more detail.
Making Tax Digital Income Tax Threshold
Why Are Limited Company Directors Confused About MTD 2026?
Three separate MTD programmes have been running in parallel, and they regularly get discussed together. That overlap is the main reason limited company directors are uncertain about whether this affects them.
- MTD for VAT: Mandatory since April 2019 for all VAT-registered businesses. This applies to your limited company if it is VAT-registered. You have likely been using MTD for VAT for years without thinking much about it.
- MTD for Corporation Tax: Proposed in HMRC consultations, then cancelled. There is no mandatory MTD for Corporation Tax. Limited companies still file CT600 returns through the existing system.
- MTD for Income Tax: New from April 2026. Applies to individuals, not companies. Applies only to qualifying income types (self-employment and rental income).
When HMRC communications mention "MTD starts in 2026," they mean the income tax rules for individuals. When your accounting software prompts you to file VAT through MTD, that is the 2019 regime. They are entirely different systems with different obligations.
HMRC also closed its free CATO (Connect and Transfer Online) service on 31 March 2026. This prompted questions from directors who suddenly could not use that service, adding to the confusion about what has actually changed for limited companies. The CATO closure affects specific filing routes but does not create a new MTD for Income Tax obligation for directors who were not already caught.
Does Making Tax Digital 2026 Apply to Limited Company Directors?
For most limited company directors: no.
Your limited company is not affected. The company files Corporation Tax via the CT600 system. MTD for Income Tax is an income tax requirement for individuals. There is no MTD requirement for Corporation Tax.
You personally are not affected if your only income from the company is salary and dividends. Neither director salary nor dividends counts as qualifying income for MTD for Income Tax purposes.
The test is simple. Ask yourself: do I have self-employment income or UK property rental income outside my limited company? If the answer is no, Making Tax Digital for Income Tax 2026 does not apply to you.
Your salary and dividend structure remains entirely unaffected. If you are reviewing your salary and dividend split for 2026/27, that is a separate planning question. Use the director salary and dividend calculator to work out your optimal split for this tax year.
What Counts as Qualifying Income for MTD for Income Tax?
Qualifying income for MTD purposes is defined specifically. It includes:
- Self-employment income: gross turnover from sole trader activities before expenses. Note this is turnover, not profit.
- UK property rental income: gross rental receipts before deducting costs such as mortgage interest, repairs, and letting agent fees.
The following income types are excluded from qualifying income and do not count toward the threshold:
- Director salary paid through PAYE
- Dividends from your limited company
- Other PAYE employment income
- Savings and investment interest
- Pension income
- Capital gains
The threshold is assessed on gross qualifying income, not net profit. A director who earns £55,000 gross rent from a property but has costs reducing net profit to £30,000 is still caught by the April 2026 threshold, because the gross figure counts.
What about foreign property? Income from overseas properties can also count as qualifying income for MTD for Income Tax. If you own rental property abroad and are UK-resident, that income may push you over the threshold. Check the detailed GOV.UK guidance or speak to an accountant before assuming overseas rental income is excluded.
When a Director Is Caught: Mixed Income Scenarios
Most agency founders running a limited company are not affected. Some are. The determining factor is always income outside the company.
Scenario 1: Salary and dividends only. A 12-person digital agency director draws £12,570 salary and £100,000 in dividends from their company. No rental property, no freelance consulting invoiced personally. Qualifying income: zero. MTD for Income Tax: not applicable.
Scenario 2: Small rental income below threshold. A branding agency founder runs the agency through a limited company but also lets a flat that generates £22,000 a year in gross rent. Qualifying income: £22,000. That is under the £50,000 threshold today. MTD does not apply in 2026/27 or 2027/28. It will apply from April 2028 when the threshold drops to £20,000.
Scenario 3: Rental income above threshold. A PR agency founder has two properties generating £58,000 in gross annual rent alongside their director salary and dividends. Qualifying income: £58,000. MTD for Income Tax applies from 6 April 2026. The director needs MTD-compatible software and must submit quarterly updates.
Scenario 4: Personal freelance income outside the company. A UX designer runs a limited company for the main agency work but takes occasional personal commissions invoiced directly, totalling £52,000 a year. That personal self-employment turnover is qualifying income. MTD applies from April 2026.
The restructuring trap
Some directors have asked whether they should restructure to avoid MTD obligations, for example by routing freelance income through the limited company instead of personally. In some cases that makes sense, but in others the corporation tax and dividend implications outweigh the MTD compliance cost. Do not restructure solely to avoid MTD without working through the full tax picture with an accountant first.
What Agency Founders Should Do Now
For most limited company directors, the action is straightforward. Work through these steps:
- Check whether you have qualifying income outside your company. If you only draw salary and dividends from your limited company, you do not need to take any action for MTD for Income Tax.
- If you have rental or personal self-employment income, add up the gross figures. Compare to the current threshold. Over £50,000: MTD applies now. Between £30,000 and £50,000: MTD applies from April 2027. Between £20,000 and £30,000: MTD applies from April 2028.
- Get MTD-compatible software if required. Xero, QuickBooks, and FreeAgent are all HMRC-recognised. Your accountant should be setting this up before the first quarterly deadline of 7 August 2026 (covering the quarter ending 5 July 2026).
- If you are near a threshold, discuss structuring options with an accountant. Holding occasional freelance work inside the company rather than personally can remove the MTD obligation for some directors. This has other implications, so get proper advice.
- Keep your MTD obligations separate. Your company's MTD for VAT obligations are unchanged. Your personal MTD for Income Tax obligations are assessed on your personal income only. They are separate systems.
MTD compliance sits alongside the wider question of how your limited company is structured for tax efficiency. The annual tax review checklist for limited company directors covers salary, dividends, pension contributions, and compliance points in one place, and it is worth running through each year alongside any MTD assessment.
For directors with contractor arrangements, note that the IR35 small company threshold also changed in April 2026. If your agency engages contractors, that is a separate compliance point worth reviewing at the same time.
Frequently Asked Questions
Does Making Tax Digital apply to limited company directors?
For most limited company directors, no. Your limited company files Corporation Tax through the CT600 system, which is unaffected by MTD for Income Tax. Personally, you are only caught by MTD for Income Tax if you have qualifying income (self-employment or UK rental income) outside your company that exceeds the threshold. Director salary and dividends do not count as qualifying income.
Do salary and dividends from my limited company count as qualifying income for MTD?
No. Director salary paid through PAYE and dividends from your limited company are both excluded from qualifying income for MTD for Income Tax purposes. Qualifying income is limited to self-employment turnover and UK property rental income. If salary and dividends are your only income, you are not required to use Making Tax Digital for Income Tax.
What counts as qualifying income for Making Tax Digital for Income Tax?
Qualifying income for MTD purposes includes gross self-employment income (your sole trader turnover before expenses, not profit) and gross UK property rental income (rent received before deducting costs). It does not include director salary, dividends, PAYE employment income, savings interest, pension income, or capital gains. The threshold is assessed on gross qualifying income, not net profit.
What is the difference between MTD for VAT and MTD for Income Tax?
They are completely separate systems. MTD for VAT has been mandatory since April 2019 for all VAT-registered businesses and applies to your limited company if it is VAT-registered. MTD for Income Tax is a new system that started in April 2026 and applies to individuals with qualifying self-employment or rental income over the threshold. A limited company director can be affected by MTD for VAT through their company but be entirely unaffected by MTD for Income Tax personally.
What if I have rental property income as well as my director salary and dividends?
In that case, you may be caught by MTD for Income Tax. Add up your gross rental income from UK properties. If it exceeds £50,000 in the 2026/27 tax year, MTD applies to you personally from April 2026. If it is between £30,000 and £50,000, MTD applies from April 2027. Between £20,000 and £30,000, from April 2028. Below £20,000, no MTD obligation currently applies. Note that these thresholds are on gross rental receipts, not net profit after expenses.
When do the Making Tax Digital income tax thresholds change?
The MTD for Income Tax threshold is being reduced in three stages. From 6 April 2026, anyone with qualifying income over £50,000 must comply. From 6 April 2027, the threshold drops to £30,000. From 6 April 2028, it falls to £20,000. There is currently no announced threshold below £20,000, but HMRC has indicated it may reduce further in future years.
Do I need to sign up for MTD if I am not required to?
Voluntary sign-up is available if you want to start using MTD-compatible software ahead of a future threshold change. However, there is no benefit to signing up early if you are not required to. Most directors drawing salary and dividends only should wait until and if a future threshold reduction brings them within scope. If you have rental income that is currently below the threshold but expected to grow, it is worth planning ahead so you are not unprepared when the lower thresholds arrive.
What software do I need if MTD for Income Tax does apply to me?
You need HMRC-recognised software that can submit quarterly updates and an end-of-period statement directly to HMRC. Xero, QuickBooks, FreeAgent, and several specialist self-assessment tools are all MTD-compatible. HMRC closed its free CATO service on 31 March 2026, so if you were using that, you need to switch. The quarterly updates cover income and expenses for each quarter, with a final declaration replacing the annual Self-Assessment return.
How Alto Can Help
Alto Accounting is an ACCA registered practice working with UK agency founders and limited company directors. We help directors understand exactly which tax changes apply to them and which ones they can safely ignore.
If you have rental income, personal self-employment income alongside your company, or you are simply not sure whether Making Tax Digital 2026 affects you, book a free consultation to get a clear answer for your specific situation.