Making Tax Digital for IT Contractors —
Why IR35 and MTD Are Completely Different Rules
Only include income earned as a sole trader. Income taken through your own limited company is outside MTD for Income Tax entirely.
If you've spent years worrying about IR35, Making Tax Digital can sound like yet another compliance headache stacked on top. For most contractors trading through their own limited company, it genuinely isn't. Here's exactly where MTD does and doesn't touch your contracting income.
- Limited company contract income is taxed through Corporation Tax. MTD for Income Tax doesn't touch it
- IR35 decides how your company income is taxed. MTD decides how self-employed and property income is reported. They don't overlap
- Sole trader freelance developers are assessed normally, and IR35 doesn't apply to them at all
Your Limited Company Usually Isn't Affected
Most contractors trade through a Personal Service Company, which pays Corporation Tax on its profits and reports separately from your personal Self Assessment. MTD for Income Tax only applies to individuals with self-employment or property income in their own name, not to companies, so your day-rate contract income sitting inside the company is simply outside its scope.
IR35 and MTD Solve Different Problems
These two rules get confused because both involve HMRC scrutiny of contractor arrangements, but they're not related. IR35 decides whether a contract delivered through your limited company should really be taxed as if you were an employee of the client. MTD decides how self-employed and property income gets reported to HMRC. A contractor firmly inside IR35 on every contract may never have an MTD obligation at all, because none of that income is personal self-employment income.
| IR35 | MTD |
|---|---|
| Decides if your contract is really employment | Decides how self-employed/property income is reported |
| Applies to limited company contractors | Applies to individuals, not companies |
| Medium/large clients determine your status | HMRC determines it from your tax return figures |
Sole Trader Freelance Developers Are Different
If you invoice clients directly as a sole trader rather than through a company, IR35 doesn't apply to you at all, that's a company-specific rule. Your gross self-employment income is simply assessed against the MTD threshold like any other self-employed person.
Best MTD Software for IT Contractors
Software links are affiliate, help fund CheckMyMTD. Recommendations based on ease of use for self-employed income tracking.
Records for Day Rates, Agencies and Several Clients
IT contractors and freelance developers often work through agencies and on fixed-term contracts, as sole traders or through a company. The records should reflect the route you use.
- Record each contract: client, agency, day rate and invoices.
- Record payments on receipt, noting any agency deductions.
- Keep software, hosting and cloud service costs.
- Keep equipment, co-working and training costs.
- Keep insurance and accountancy fees.
Where IT Contractors Go Wrong on MTD
- Assuming a company protects you. A company is outside MTD for Income Tax, but any personal self-employed income still counts.
- Confusing IR35 with MTD. They solve different problems, and a sole trader is tested on gross fees.
- Netting off an agency fee. Record the gross and the deduction separately.
- Counting payslip work. An inside-IR35 payslip is employment income.
- Skipping equipment. Laptops are capital items, so keep the invoice.
A Sample Quarter: What the Update Looks Like
A sample quarter for a developer with one main contract and a side client.
| Q2: 6 July to 5 October 2026 | Amount |
|---|---|
| Day-rate contract invoices | £21,800 |
| Freelance side projects | £2,900 |
| Total income | £24,700 |
| Software and hosting | £720 |
| Equipment and co-working | £680 |
| Insurance and accountancy | £540 |
| Training and travel | £460 |
| Total expenses | £2,400 |
| Profit for the quarter | £22,300 |
A single large contract makes the threshold easy to forecast, and also makes a gap between contracts more visible.
Frequently Asked Questions
I contract through my own limited company. Does MTD for Income Tax apply to me?
Not to your company's contract income, which is taxed through Corporation Tax and reported separately. MTD for Income Tax only applies to individuals with self-employment or property income in their own name, so it's only relevant if you also have separate personal income outside the company.
Is IR35 the same thing as Making Tax Digital?
No. IR35 decides whether a contract you deliver through your limited company should be taxed like employment. MTD is a separate reporting system for self-employed and property income. A contractor can be affected by IR35 rules and never be affected by MTD at all, if all their income runs through the company.
I'm a sole trader freelance developer, not a limited company. Does MTD apply?
Yes, in the normal way. If you invoice clients directly as a sole trader rather than through a company, your gross self-employment income is assessed against the MTD threshold like any other self-employed person, and IR35 doesn't apply to sole traders at all.
Who decides my IR35 status, me or my client?
It depends on the client's size. Medium and large private sector companies, and all public sector bodies, must determine your IR35 status themselves. Small private sector clients leave the determination to your own limited company.
Can I claim home office and equipment costs?
Yes, whether trading as a sole trader or through a limited company, though the mechanics differ slightly. A proportion of home running costs, your computer equipment, software licences, and business proportion of phone and broadband are normally allowable.