MTD for Consultants and Freelancers —
IR35, Day Rates, and What Counts
Use your gross invoiced fees before software, travel or subcontractor costs are deducted.
Consultants and freelancers — IT contractors, management consultants, marketing freelancers, project managers, and other knowledge workers — are among the most common sole traders in scope for Making Tax Digital from April 2026. Day rate earners, retained consultants, and fixed-fee project workers are all treated as self-employed sole traders for MTD, with qualifying income calculated on gross fees before any business expenses.
MTD Threshold for Consultants
Your MTD qualifying income is your gross self-employment income — total fees invoiced before any business expenses (travel, software, equipment, professional subscriptions, home office). A consultant billing £60,000 and spending £15,000 on expenses has £60,000 qualifying income, not £45,000.
| Gross qualifying income (previous year) | MTD mandatory from |
|---|---|
| Over £50,000 | 6 April 2026. Live since April 2026 |
| Over £30,000 | 6 April 2027 |
| Over £20,000 | 6 April 2028 |
IR35 and MTD — What Changes
If you operate through a limited company and are caught by IR35, the deemed employment income is PAYE, it does not count towards the MTD qualifying income threshold. MTD for Income Tax applies to sole traders and landlords, not to limited company directors.
However, if you also have self-employed income outside the limited company, for example, consulting work billed personally or overseas contract fees — that income counts towards your MTD threshold as an individual.
Important: MTD for Corporation Tax (which would affect limited companies) has been cancelled by HMRC. Limited companies will not face MTD requirements.
Day Rate Consultants — Common Scenarios
| Scenario | Qualifying income | MTD status (Phase 1) |
|---|---|---|
| IT contractor, £600/day, 200 days, sole trader | £120,000 | Mandatory — Live Now |
| Marketing freelancer, £40,000 gross | £40,000 | Mandatory April 2027 |
| Management consultant, £55,000, via Ltd Co only | £0 (PAYE/dividends) | Not in scope |
| Part-time consultant, £22,000 + £8,000 rental | £30,000 | Mandatory April 2027 |
What Expenses Can You Deduct?
Expenses reduce your taxable profit but do not reduce your MTD qualifying income threshold. MTD threshold is always gross. However, you still claim expenses in your quarterly updates and Final Declaration to calculate your actual tax liability.
Allowable expenses for consultants: professional subscriptions (CIMA, BCS, APM, CIPD), software licences (Office 365, Adobe, Slack, Zoom), home office (flat rate £6/week or actual calculation), travel to client sites (not commuting), equipment (laptops, monitors — capital allowances), professional indemnity insurance, accountancy fees.
Best MTD Software for Consultants
| Software | Best for | Cost/month | Standout feature |
|---|---|---|---|
| FreeAgent | Freelancers with varied clients | £19 | Invoice tracking + MTD built-in |
| QuickBooks Sole Trader | High-mileage consultants | £14 | Automatic mileage tracking |
| Xero | Consultants with accountants | £16 | Best accountant collaboration |
| Zoho Books | Budget-conscious freelancers | Free tier | Free for under £50k turnover |
What Goes in Each Quarterly Update?
Each quarterly update is a summary of income and expenses for the quarter — not a full tax return. You submit total fees received and total allowable expenses by category. You do not need to list individual invoices or receipts in the quarterly update (though you must keep digital records of them).
Categories for consultants: self-employment income, travel and accommodation, professional services and subscriptions, home working costs, equipment and technology, marketing and advertising, other allowable expenses.
Records for Retainers, Projects and Day Rates
Consultants invoice a mix of retainers, projects and day rates, often to several clients at once. A client ledger keeps them together.
- Record each client, the fee basis and every invoice and payment.
- Record retainers on receipt, and project fees by stage.
- Keep insurance, memberships and software costs.
- Keep travel, subsistence and co-working receipts.
- Keep training and accountancy costs.
A Sample Quarter: What the Update Looks Like
A sample quarter for a consultant with a retainer base and some projects.
| Q2: 6 July to 5 October 2026 | Amount |
|---|---|
| Retainer clients | £9,600 |
| Project fees | £5,800 |
| Day-rate engagements | £3,700 |
| Total income | £19,100 |
| Insurance and memberships | £580 |
| Software and subscriptions | £640 |
| Travel and subsistence | £1,250 |
| Co-working and accountancy | £900 |
| Total expenses | £3,370 |
| Profit for the quarter | £15,730 |
Retainers make the quarters steady, and project fees are what move them.
Frequently Asked Questions
I bill via an agency — does the agency commission reduce my qualifying income?
No. Qualifying income is your gross fees before agency commission or any other deductions. If an agency bills a client £100/day and pays you £80/day, your qualifying income is £80/day — the amount you receive, not the client's total cost.
I have a mix of employed and self-employed income, what counts?
Only self-employment income counts towards the MTD qualifying income threshold. PAYE employment income is excluded. If you earn £30,000 PAYE and £25,000 consulting fees, only £25,000 counts for MTD — you would not be in scope for Phase 1.
Do retainer fees count as self-employment income?
Yes. Monthly retainer fees from clients are self-employment income and count in full towards your MTD qualifying income. They are included in the quarter in which you receive them (cash basis) or earn them (accruals basis).
I work internationally — do overseas client fees count?
Yes. If you are UK tax resident, all self-employment income — from UK and overseas clients — counts towards your MTD qualifying income threshold. The income is taxable in the UK and must be declared.
Do I need to keep paper receipts or can everything be digital?
MTD requires digital record keeping — you must keep records in an HMRC-approved software. Most software allows photo receipts (Hubdoc, Dext, or built-in camera capture). Paper receipts are not required if a digital copy is stored in your software.