Diploma in Professional Accounting
Diploma for Financial Advisers
Member of London Institute of Banking and Finance

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Making Tax Digital (MTD) is a government initiative by HMRC to make tax administration more efficient and easier for businesses and individuals. For self-employed individuals and landlords, MTD for Income Tax Self Assessment (ITSA) means a new way of keeping records and sending updates to HMRC. This guide will help you understand what counts as digital records under MTD, ensuring you stay compliant and make the transition smoothly. We’ll break down the requirements in simple terms, using official guidance from GOV.UK.

What is Making Tax Digital for Income Tax?

Making Tax Digital for Income Tax is a system that requires most self-employed individuals and landlords to keep digital records of their income and expenses and send quarterly updates to HMRC using MTD-compatible software. This replaces the traditional annual Self Assessment tax return for many. The aim is to reduce errors and make tax reporting more streamlined. [1]

Who needs to follow MTD for Income Tax?

Starting from April 2026, MTD for Income Tax will become mandatory for self-employed individuals and landlords with a qualifying income over £50,000. From April 2027, this will extend to those with a qualifying income between £30,000 and £50,000. [1]

The Core of Digital Record Keeping: What You MUST Keep Digitally

Under MTD for Income Tax, certain records must be kept digitally. These are the fundamental financial details of your self-employment or property business. HMRC specifies that you need to create and store digital records for your self-employment and property income and expenses. [2]

For Self-Employment:

•Income: This includes all your sales, takings, and fees. Every penny earned from your business activities needs to be recorded digitally.

•Expenses: This covers all costs related to running your business, such as the cost of stock, travel expenses, office costs, and other financial outlays. [2]

For Property Income:

•Income: This includes rent received, premiums for granting a lease, reverse premiums, and any inducements.

•Expenses: This covers costs like rent you pay (if applicable), repair costs, maintenance, and other services related to your property. [2]

Key Details for Each Record:

For every income and expense entry, your digital records must include specific information:

•The amount of the transaction.

•The date when the income was received or the expense was incurred.

•The category of the income or expense. This will depend on your specific record-keeping requirements and should align with HMRC’s categories, which are generally the same as those used for Self Assessment. [2]

Multiple Businesses:

If you operate more than one self-employment business or have multiple property businesses, you must keep separate digital records for each. For example, if you are a freelance designer and also rent out a property, you would need distinct digital records for each activity. Similarly, if you have both UK and foreign properties, these are treated as separate businesses for record-keeping purposes. [2]

What You CAN Choose to Keep Digitally (Optional Digital Records)

While some records are mandatory to keep digitally, others are optional. Keeping these optional records digitally can still be beneficial, as it helps you maintain a more comprehensive and up-to-date view of your financial affairs. [2]

Other Income Sources:

Income not directly from self-employment or property, such as employment income (PAYE), partnership income, or dividends from your own company, does not have to be recorded digitally under MTD for Income Tax. However, if your MTD-compatible software has the functionality, you can choose to report these income sources digitally during the tax year. [2]

Disallowable Expenses:

Disallowable expenses are costs that are not wholly and exclusively for business purposes and therefore cannot be claimed against your tax return. If you currently keep records of the disallowable portion of your expenses, you should continue to do so digitally. For instance, if a phone bill is £200, with £125 for business and £75 for personal use, you can choose to record both the full £200 expense and the £75 disallowable portion digitally. [2]

Simplified Expenses:

If you use the simplified expenses scheme, you are not required to keep digital records of your actual expenses. However, if you are unsure whether simplified expenses apply to you, it’s generally best practice to keep digital records of all your expenses. [2]

Transactions with Mixed Capital and Revenue Elements:

For transactions that include both capital and revenue elements (e.g., certain mortgage payments), you have two options for digital record-keeping:

1.Record the full value of the transaction (including capital elements) and then make an adjustment in your software before finalising your Income Tax position.

2.Record only the revenue amount digitally. [2]

Conclusion

Making Tax Digital for Income Tax aims to simplify tax reporting for the self-employed and landlords. Understanding what counts as digital records is crucial for compliance. By keeping accurate digital records of your income and expenses using MTD-compatible software, you can ensure a smooth transition and efficient tax management. Always refer to the official GOV.UK guidance for the most up-to-date and detailed information.

References

[1] GOV.UK. Making Tax Digital for Income Tax for sole traders and landlords: step by step. Available at: https://www.gov.uk/government/collections/making-tax-digital-for-income-tax-for-businesses-step-by-step

[2] GOV.UK. Use Making Tax Digital for Income Tax – Create digital records. Available at: https://www.gov.uk/guidance/use-making-tax-digital-for-income-tax/create-digital-records

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