Entity Setup
Entity Setup for Small UK Tech Start-Ups: From Choice of Structure to MTD Compliance
Choosing the right structure (sole trader, LLP, Ltd) early matters—especially with Making Tax Digital coming in. Here's how UK tech founders should set up.
By NomadicTax Research Team • 5-8 min read • August 11, 2026
## Choosing Your Legal Entity
| Structure | Pros | Cons |
|---|---|---|
| **Sole Trader / Freelancer** | Lowest setup cost; simple compliance; all profits taxed via Self Assessment | Unlimited liability; less tax planning flexibility; MTD applies once threshold crossed |
| **Partnership / LLP** | Shared responsibilities; some corporate-law protection (LLP); more structure than sole trader | More complex accounts; profit sharing; administrative burden |
| **Limited Company** | Limited liability; tax planning options (dividends, salaries); attracts investment easily | More formal governance; higher filing costs; requirements for corporation tax; PAYE for directors |
## Making Tax Digital (MTD) Obligations
- As of **6 April 2026**, sole traders and landlords with qualifying income over **£50,000** must use MTD for Income Tax: quarterly updates, digital records. ([gov.uk](https://www.gov.uk/government/publications/extension-of-making-tax-digital-for-income-tax-self-assessment-to-sole-traders-and-landlords/making-tax-digital-for-income-tax-self-assessment-for-sole-traders-and-landlords?utm_source=openai))
- Thresholds reduce: **£30,000** from April 2027; **£20,000** from April 2028. ([gov.uk](https://www.gov.uk/government/publications/extension-of-making-tax-digital-for-income-tax-self-assessment-to-sole-traders-and-landlords/making-tax-digital-for-income-tax-self-assessment-for-sole-traders-and-landlords?utm_source=openai))
- Companies must keep digital records too, and any owner who takes income via dividends or salary still faces PAYE and corporation tax obligations.
## Tax Planning Strategies for New Entities
- Use of **salary + dividend mix** in limited companies to reduce National Insurance and income tax.
- Plan ahead for **IR35/self-employment vs employee**, especially in tech contracts—ensuring contracts reflect real independence.
- Claim **R&D tax relief** if developing software products or tech innovation.
- Consider **Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS)** for early-stage funding—tax reliefs are valuable but must follow rules on qualifying trades and unconnected investors.
## Compliance Essentials
- Register for Corporation Tax within **3 months** of starting business if limited company.
- Keep accurate financial records—sales, purchases, expenses. Use accounting software that is MTD-compliant if needed.
- File annual accounts and confirmation statements at Companies House. \n- File Corporation Tax returns, PAYE returns, VAT returns if applicable.
## Example
Tech startup “AppNexus Ltd” founded by two software developers:
- They take **small salaries** to cover personal expenses, and the rest as dividends—this reduces employer NI and avoids higher-band tax where possible.
- They keep digital records via cloud accounting, use quarterly updates under MTD when their income exceeds threshold.
- They claim R&D tax credits for innovation work, and when raising seed investment, use EIS to give investors tax relief.
**Bottom line:** structuring matters for limited liability and tax efficiency. With MTD thresholds changing, founders need to choose entity type and financial systems that will scale cleanly.