Date posted: 1st Nov 2025
April 2026 marks a significant change for many self-employed individuals (and landlords) in the UK, as Making Tax Digital (MTD) for Income Tax Self-Assessment will become a legal requirement.
Those with business and/or rental income over £50,000 annually will need to submit quarterly income and expense updates to HMRC using MTD-compatible software—significantly increasing administrative workload compared to the traditional once-a-year self-assessment tax return.
Unsurprisingly, many small business owners are considering if incorporating as a limited company might help them avoid or delay these quarterly digital reporting requirements.
Our article focusses on trading businesses (rather than rental activities) and sets out what incorporating a trading business means, how it interacts with MTD, and the key implications small business owners should consider before making the switch.
What Is Making Tax Digital for Income Tax?
MTD for Income Tax aims to modernise tax administration by requiring digital recording and submission of income and expenses at least every three months, plus a final annual declaration.
This replaces the older system where many sole traders and landlords filed one paper or digital tax return after the end of each tax year. Compliance demands businesses use HMRC-approved software or apps to ensure digital linking and accurate record keeping, making real-time income tax management possible. However, the transition requires significant adjustments in ways of working and creates tight deadlines for submissions on a regular basis.
Who Must Comply?
MTD for Income Tax applies to sole traders and landlords with income (not profits) exceeding the £50,000 threshold from April 2026.
This income threshold is anticipated to decrease to £30,000 from April 2027 and then £20,000 from April 2028 bringing significant amounts of landlords and sole traders into quarterly reporting.
Why Consider Incorporation to Avoid Quarterly Reporting?
Limited companies currently file corporation tax returns once a year and are not yet subject to MTD for Corporation Tax or quarterly reporting requirements. By incorporating a business, owners may delay mandatory MTD quarterly submissions because their profits become subject to corporation tax rules rather than income tax self-assessment. This time advantage is attractive for busy small businesses reluctant to handle increased quarterly compliance and software costs.
However, incorporating solely to avoid MTD is not necessarily a straightforward solution. The government is expected to extend MTD to corporation tax eventually, meaning incorporation merely postpones digital obligations rather than eliminates them. Moreover, incorporation entails a fundamental change in business structure with new responsibilities and costs.
Key Considerations for Incorporating
Legal and Administrative Changes
Incorporating a business creates a separate legal entity distinct from its owners. Many owners struggle to comprehend that they work for the company and that any money earned belongs to the company in the first instance, which means a different mind set is needed compared to being a sole trader.
You must register with Companies House, appoint company directors, decide on share capital, and maintain statutory records. Annual filing of accounts and confirmation statements is mandatory, with responsibilities to keep accurate records, run payroll if paying salaries, and comply with corporation tax rules.
All business contracts, bank accounts, and assets must be formally transferred to the new company, which can require legal and accounting assistance to do correctly without breaching HMRC guidelines.
Increased Compliance and Costs
Running a limited company typically means higher administrative and compliance costs.
Accountancy fees rise due to more complex statutory reporting, payroll administration, and corporation tax filings. Software expenses add up, especially when combined with record keeping, bookkeeping, and professional advice fees.
Tax Implications
Incorporation opens doors to possible tax planning via salary and dividends payments, which can be tax efficient under certain circumstances.
However, current corporation tax rates range between 19% and 26.5% (with personal tax due on income withdrawn from the company).
Tax savings compared to sole trader income tax are not automatic (sometimes more tax can be payable via a limited company for a small business) and depend on profits withdrawn, personal tax allowances, and dividend taxation.
Liability Protection
A limited company offers limited liability status, protecting personal assets from business debts unless wrongful trading or personal guarantees occur. This can provide peace of mind, particularly for businesses with growing financial exposure.
Increased Transparency
Limited companies file annual accounts that become public record, meaning more financial and business information is openly accessible to competitors, clients, and other third parties. Sole traders do not face this disclosure requirement.
Business Perception and Growth Opportunities
Operating as a limited company may enhance business credibility and attractiveness to investors or partners. Incorporation can also facilitate future expansion, sale, or acquisition.
Staying as you are?
For many sole traders, investing in MTD-compatible cloud accounting software such as Xero or QuickBooks streamlines quarterly reporting without the need for legal restructuring.
Staying self-employed and embracing digital tools might be the best path if the business prefers fewer compliance obligations and lower costs.
Indeed, if VAT registration is being considered (either due to nearing turnover thresholds or voluntarily) the business will be required to register for MTD for VAT, in any event.
Conclusion
Incorporating a business to avoid the upcoming MTD quarterly reporting requirements may seem appealing as it provides some temporary relief from more frequent digital submissions.
However, it is a major decision with consequences far beyond tax reporting frequency. Increased costs, legal obligations, and administrative responsibilities must be balanced against potential tax planning opportunities and liability protection.
Small business owners should evaluate their business model, profit levels, growth aspirations, and willingness to handle more complex compliance before deciding. Consulting with us can help clarify if incorporation fits your specific circumstances or if adapting to MTD as a sole trader is preferable.
Ultimately, Making Tax Digital represents an important modernisation with inconveniences but also opportunities for better tax management. Whether staying a sole trader or forming a limited company, preparation and informed decisions today will position your business for success tomorrow.
If help is needed navigating the changes to tax digitalisation or incorporation options, contacting us can provide peace of mind in this evolving landscape.
