Making Tax Digital for contractors: a how-to (and from when explainer)

Making Tax Digital (MTD) is transforming the UK’s tax system.

What is Making Tax Digital?

Originally launched to modernise VAT reporting, the government initiative has evolved into a sweeping digital overhaul of how individuals and businesses interact with HMRC.

Making Tax Digital (MTD) for Contractor Sector Workers be like…

For limited company contractors, umbrella workers, and anyone earning through self-employment or property, MTD’s expansion presents a mix of immediate obligations and upcoming challenges.

The key is knowing what applies to you—and when, writes chartered accountant Helen Christopher, founder of Beansprout Consultancy, exclusively for ContractorUK.

MTD: A System Already in Motion

MTD isn’t new. Since April 2019, VAT-registered businesses with taxable turnover above £85,000 (now £90,000) have been required to keep digital records and file VAT returns using MTD-compliant software.

In 2022, this requirement was extended to all VAT-registered businesses, regardless of turnover.

As a result, many Personal Service Companies (PSCs) are already within scope. Whether voluntarily registered or due to turnover thresholds, VAT-registered PSCs should already be maintaining digital records and using cloud accounting platforms that integrate directly with HMRC.

MTD for Income Tax: The Next Phase

The more significant shift lies ahead with MTD for Income Tax Self-Assessment (MTD ITSA), set to introduce quarterly reporting for a broad range of taxpayers.

From April 2026, MTD ITSA will apply to self-employed individuals and landlords with total gross income above £50,000. They’ll be required to:

• Maintain digital records,
• Submit quarterly updates of income and expenses using compatible software, and
• File an end-of-year final declaration (a replacement for the Self-Assessment tax return) by January 31st.

The MTD rollout then continues…

From April 2027, the threshold drops to £30,000.

From 2028, Making Tax Digital is expected to extend further to those with income over £20,000.

So, what does this mean for limited company contractors (also known as PSCs) and umbrella workers?

PSC Contractors and MTD

At the time of writing, MTD for corporation tax is still under consultation, so PSCs themselves are not yet affected by the 2026 MTD ITSA changes.

If you run a limited company / PSC, and have no other income sources, you’re not affected by MTD ITSA just yet. But if you’re juggling multiple revenue streams, it’s time to prepare.

PSC directors with additional self-employment or property income over the thresholds will need to comply with MTD ITSA. That means three things:

1. Keeping digital records for non-PSC income sources,
2. Making quarterly submissions, and;
3. Filing an annual Self-Assessment statement.

The final Self-Assessment process will remain unchanged under MTD. The PSC director will still need to report salary and dividend income from the PSC, along with all other sources of income.

MTD for Umbrella Company Employees

If you work via an umbrella company, your tax is handled through PAYE. The umbrella company takes care of payroll and reporting obligations, so you’re currently outside the scope of MTD for VAT or Income Tax.

However, just like PSC directors, umbrella workers with additional income—such as from rental properties or freelance side work—could still be affected by MTD ITSA from 2026 or later, depending on their earnings.

In those cases, digital bookkeeping and quarterly reporting will apply to that income, even if your main employment is managed through the umbrella.

MTD Preparation: What Four Steps Should Contractors be Taking Now?

No matter your setup, now is the time to review your income and prepare for what’s ahead:

1. Assess your income sources: Do you have property or freelance income alongside your main contracting work? If so, check whether your total income will meet the MTD thresholds from 2026 onwards.
2. Adopt digital tools early: If you're still relying on spreadsheets or manual records, now’s the time to move to cloud accounting software (such as Xero, FreeAgent, and QuickBooks). These platforms are MTD-ready and offer useful integrations for bank feeds, invoicing, and expense tracking.
3. Speak to your accountant: An MTD-compliant accountant can help you identify your obligations and set up the right systems to avoid last-minute stress.
4. Stay informed: MTD rules are evolving. Keep an eye on updates from HMRC, particularly as timelines or thresholds may shift again before rollout.

Making Tax Digital Summary for Contractors

Making Tax Digital is not a passing initiative—it’s the future of tax compliance in the UK.

But with a phased rollout, its impact depends on your structure, income, and how prepared you are to embrace digital systems.

For PSC directors, the immediate focus remains on MTD for VAT and future corporation tax developments.

For self-employed professionals and landlords, MTD ITSA is on the horizon—and getting closer. For umbrella employees, the risk lies in side income pulling them into the MTD net.

In all cases, one thing is certain: digital record-keeping and software-driven reporting are here to stay. Whether this simplifies or complicates life will largely depend on how early—and how well—you adapt.