Making Tax Digital pushes sole traders to incorporate

Taxfix has found that many UK sole traders are changing their business structure or considering a return to salaried work because of Making Tax Digital. The findings suggest the policy is affecting self-employment beyond tax reporting.

According to the tax app company's data, nearly a quarter of sole traders affected by the rules have already set up, or started setting up, a limited company because of Making Tax Digital. A further 57% said they had considered doing so.

The figures suggest a reform intended to expand digital tax reporting is also shaping decisions about legal structure. For sole traders, incorporation brings a different set of accounting, filing and compliance duties, even if some see it as a way to manage the burden of the new reporting system.

The survey also found that 45% of respondents had considered leaving self-employment and returning to permanent salaried work because of Making Tax Digital. That points to a possible effect on business formation and the size of the self-employed workforce at a time when policymakers remain focused on growth and productivity.

Age appears to influence how people are responding. Among 18 to 24-year-olds, 29% said they had already set up or begun setting up a company at least partly because of Making Tax Digital, compared with 28% of those aged 25 to 34. The share fell to 21% among 35 to 44-year-olds, 20% among 45 to 54-year-olds and 14% among those over 55.

A similar pattern appeared in views on returning to employment. Six in 10 respondents aged 18 to 24 said the tax changes had made them consider going back to salaried work, compared with 48% of those aged 25 to 34, 43% of those aged 35 to 44, 39% of those aged 45 to 54 and 40% of those over 55.

Record keeping

The research indicates that many sole traders are still adjusting to the practical demands of digital record keeping. Four in 10 said they had started keeping digital records but were not confident they were doing it correctly, while 46% said they were using compatible software and felt ready to submit.

That split suggests awareness has improved, but confidence remains uneven as quarterly reporting approaches. For some businesses, the challenge appears to extend beyond software adoption to the wider time and administrative demands of staying compliant.

The survey found signs that the changes are already affecting day-to-day business decisions. While 39% said they felt more on top of their finances, 29% said they had become more cautious about taking on new work, 25% said they had raised or planned to raise prices to cover the extra administration, and 19% said they had delayed plans to grow or invest.

The figures suggest a mixed picture. Some sole traders say digital reporting is helping them manage their finances more closely, while others appear to be limiting activity, passing on costs or postponing expansion.

Employment concerns

For those considering leaving self-employment, moving back into a salaried role is not seen as straightforward. More than a third, or 37%, said they were worried they would struggle to find a job that matched their current income.

The main concerns were lower income, cited by 41%, followed by a competitive labour market at 32%, age discrimination at 31%, spending too long outside traditional employment at 29%, and fears that employers might view self-employment negatively at 24%.

This suggests Making Tax Digital may be putting pressure on workers who do not see an easy alternative in the wider labour market. It also raises the prospect that some may be changing their business structure not because it suits their commercial needs, but to avoid extra administrative strain.

"Making Tax Digital was meant to modernise the system. Instead, our research suggests it's pushing many to change their business structure or leave self-employment entirely. What's particularly concerning is that with nearly a quarter (23%) of sole traders setting up, or starting to set up, a limited company, incorporation is increasingly being viewed as an escape route. But incorporation isn't a shortcut to less admin. Limited companies face their own complex filing obligations, with a broader set of tax, accounting and filing requirements. While closing the tax gap is an important goal, if sole traders respond to MTD by incorporating, the policy could instead push businesses outside the very system it was designed to bring them into. The focus now must be on simplifying the system and making compliance achievable, not something to be worked around," said Oliver Harcourt, Senior Director, Taxfix.