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Making Tax Digital (MTD) has been talked about for years, but the rules have shifted so often that many company directors still aren’t sure what applies to them, what doesn’t, and what’s coming next. 

If you run a Limited Company, CIC, Partnership or operate as a Sole Trader, MTD should still be on your radar – even if most of your income comes via salary and dividends. Parts of the scheme are already mandatory, while others are being phased in over the next few years. 

This article clears up the current position, what’s changing, and what it means for directors who may have income beyond their company. 

What Exactly Is Making Tax Digital?

Making Tax Digital is the UK Government’s plan to modernise the tax system by requiring businesses and individuals to: 

• Keep digital records 
• Use MTD-compatible software (such as Xero) 
• Submit information to HMRC digitally and more frequently 

The aim is fewer errors, simpler record-keeping, and more real-time understanding of tax obligations. 

At the moment, MTD applies to VAT. The next major rollout will be Income Tax, starting from April 2026. 

MTD for VAT – Where Things Stand Now 

This is the part most company directors are already familiar with. 

MTD for VAT is already mandatory for all VAT-registered businesses, regardless of turnover. This has been the case since April 2022. 

If your business is VAT-registered, you’re automatically within MTD for VAT. 

This means you must: 

• Keep VAT-related records digitally 
• Use HMRC-recognised software to submit VAT returns 
• Maintain digital links (you can’t manually cut-and-paste figures into HMRC’s site) 

Tools like Xero help streamline the process, but the important thing is simply – if you’re VAT-registered, you’re in. 

Common questions we hear from directors: 

“Do we need to do anything new?” 
No new changes have been introduced recently – just continue using approved software such as Xero to track your income and expenses digitally. 

“Is spreadsheet VAT still allowed?” 
Only if you use digital links or a bridging tool. Manual entry or copy-paste isn’t permitted. 

“Are any businesses exempt?” 
Only in very specific cases such as technology-prohibitive disabilities, remote locations with no broadband, or insolvency. 

For most companies, MTD for VAT is simply business as usual now. 

MTD for Income Tax – The Big Change Ahead 

This is where future planning matters – especially for company directors who have any income beyond their PAYE salary and dividends. 

MTD for Income Tax (MTD for ITSA) applies to individuals, not companies, and focuses on: 

• Self-employed income 
• Property rental income 
• Side businesses or ad-hoc income 
• Freelance or consultancy work 

Many directors fall into these categories without realising it. 

MTD for Income Tax does not apply to your company. 

But it may apply to you personally. 

Who Will Be Required To Join MTD For Income Tax – And When? 

HMRC will begin phasing individuals in from: 

• 6 April 2026 → income over £50,000 
• 6 April 2027 → income over £30,000 
• 6 April 2028 → income over £20,000 

These thresholds relate to combined income from self-employment and/or property -not salary or dividends from your company. 

Examples of directors who may be affected: 

• A director with a buy-to-let property 
• A director who freelances or consults on the side 
• A CIC director receiving additional self-employed income 
• A general partner in a Limited Partnership 
• A director with Airbnb or holiday-let income 
• A director earning extra income from creative work or occasional trade 
• If any of these apply, MTD for Income Tax may apply to your personal affairs. 

What Will MTD For Income Tax Require? 

Instead of one annual Self-Assessment return, individuals will need to: 

1. Keep digital records 

Using recognised software. 

2. Submit quarterly updates 

These are summaries, not full tax returns, but they must be submitted via software. 

3. Submit an annual “Final Declaration” 

This replaces the existing Self-Assessment tax return. 

The aim is to make tax more accurate throughout the year, but it will require new habits around record-keeping. 

What This Means For Company Directors 

Even if your limited company accounts are immaculate, directors often have side income that isn’t. MTD brings this all under one digital umbrella. 

Directors who prepare early will benefit from: 

✔ More accurate year-round visibility 

Particularly useful for managing personal tax bills, dividend planning and cash reserves. 

✔ Cleaner separation between “company finances” and “personal finances” 

Many directors unintentionally blend the two. 

✔ Fewer last-minute January Self-Assessment scrambles 

Quarterly reporting spreads the workload. 

✔ Better planning for rental portfolios 

Digital tracking makes profitability and tax-efficiency far clearer. 

Xero and similar tools help centralise this, but the real benefit is clarity – knowing where you stand, avoidably and throughout the year. 

Common Misconceptions Cleared Up 

“MTD doesn’t apply to company owners.” 
It doesn’t apply to the company, but it can apply to you personally. 

“My rental income is small, so I’m exempt.” 
MTD is based on gross income – even modest property income can count. 

“It won’t happen – HMRC keeps delaying.” 
The timeline has stabilised. April 2026 is locked in for the next wave. 

“I can still use spreadsheets.” 
Only with digital links or bridging software – manual spreadsheets will not comply. 

Summary – MTD Doesn’t Need To Be Stressful 

Making Tax Digital isn’t just about compliance. 
For many directors, it’s an opportunity to get a clearer view of both personal finances and business finances in one place. 

MTD for VAT is already here – and unchanged for now. 

MTD for Income Tax is coming – and could affect you if you have rental or self-employed income. 

Using software like Xero makes the transition much easier, and working with an advisor such as MYCO Works can help ensure everything is set up correctly, without the stress. 

This article was written in partnership with Xero, all clients of MYCO Works that are new to Xero will receive an exclusive discount to their services for a limited time only.