Making Tax Digital for Income Tax: What Changes for a Sole Trader in 2026

Making Tax Digital for Income Tax (MTD ITSA) goes live for sole traders and landlords from April 2026. If you are a sole trader with self-employment income over £50,000 a year, you will need to submit quarterly digital updates to HMRC instead of filing one annual self assessment return. The same applies from April 2027 if your income is between £30,000 and £50,000, and from April 2028 if it is between £20,000 and £30,000.

But what happens if you are a sole trader who also receives dividend income from a separate share portfolio? Do those dividends need quarterly reporting too? The short answer is no. But the detail matters, because you still need to include that dividend income on your annual end-of-period statement.

This article explains exactly how making tax digital for income tax applies when you have two income sources: self-employment (which needs quarterly reporting) and dividend income (which does not).

What Income Is Covered by MTD ITSA Quarterly Reporting

MTD ITSA divides your income into two categories for reporting purposes.

Income that requires quarterly digital updates:

  • Self-employment income (sole trader or partnership)
  • Property income (rental income from UK land or property)

Income that does not require quarterly updates:

  • Employment income (PAYE salaries)
  • Dividend income from UK companies
  • Interest income from savings accounts
  • Pension income
  • Capital gains
  • Foreign income (with some exceptions)

Dividend income stays on your annual end-of-period statement (EOPS) and final declaration. You do not need to send quarterly updates for dividends. But you must still include them in your overall tax picture for the year.

How a Sole Trader With Dividends Reports Under MTD ITSA

Let us walk through a real example. Say you are a freelance consultant in Manchester, running as a sole trader with self-employment profits of £65,000 a year. You also hold a portfolio of UK shares that pays £8,000 in dividends annually. Your total income is £73,000.

Under MTD ITSA, here is what you report and when:

Quarterly updates (4 per year)

You submit a quarterly digital summary of your self-employment income and expenses. This uses your accounting software (Xero, FreeAgent, QuickBooks, or any MTD-compatible package) to send HMRC a cumulative total for the quarter. You do not include dividends in these quarterly updates.

Each quarterly update covers self-employment only. HMRC uses these to build a running picture of your trading income. They do not calculate your tax bill from these alone.

End-of-period statement (EOPS)

After your accounting year ends (typically 5 April), you submit an EOPS for each income source that requires quarterly reporting. For our Manchester consultant, that means one EOPS for self-employment. This finalises the figures for that trade.

Final declaration

This replaces the current self assessment return (SA100). You bring together all your income sources: self-employment (from the EOPS), dividends, any savings interest, and capital gains. You claim reliefs, deduct personal allowance, and calculate your final tax liability.

The dividend income of £8,000 goes onto the final declaration only. Not into quarterly updates.

Dividend Allowance and Tax Rates for 2025/26

For the 2025/26 tax year, the dividend allowance is £500. That means the first £500 of dividend income is tax-free. Above that, dividends are taxed at:

  • 8.75% basic rate (income up to £50,270)
  • 33.75% higher rate (£50,271 to £125,140)
  • 39.35% additional rate (above £125,140)

Dividends sit on top of your other income for tax band purposes. So in our example, the consultant has £65,000 self-employment profit. After the personal allowance of £12,570, their taxable self-employment income is £52,430. That puts them in higher rate territory above £50,270. The £8,000 dividend income then gets taxed at 33.75% on the £7,500 above the £500 allowance, giving a dividend tax bill of £2,531.25.

Under MTD ITSA, that calculation happens in the final declaration. Not in quarterly updates.

What Software Do You Need for MTD ITSA

You need MTD-compatible software for your quarterly updates. Most mainstream accounting packages already support MTD for VAT and are adding MTD ITSA functionality. Xero and FreeAgent both have MTD ITSA modules in development. QuickBooks Self-Employed also plans to support it. Sage Accounting and Crunch are other options.

Your dividend income does not need separate software. You simply declare the total dividends received on your final declaration, just as you would on the current self assessment. Your accounting software may allow you to record dividends as non-trading income, but that is for your own records, not for HMRC submission.

If you use a separate platform for share dealing (like Hargreaves Lansdown, AJ Bell, or Interactive Investor), you download the annual dividend statement and enter the figure into your final declaration manually.

What Happens to Self Assessment Returns

From April 2026, the traditional self assessment return (SA100) is replaced by the MTD ITSA final declaration for those within the mandatory scope. If you are below the threshold, you continue filing a normal self assessment return on the current system.

For our consultant with £73,000 total income, they are above the £50,000 threshold. So from April 2026, they must use MTD ITSA. They will not file an SA100. They submit quarterly updates, an EOPS for self-employment, and a final declaration that includes dividends.

If your self-employment income is below £50,000 but you still want to use MTD ITSA voluntarily, you can. HMRC allows voluntary adoption from April 2026. You would then follow the same quarterly reporting structure, even if not mandated.

Dividend Income From Your Own Limited Company

A separate scenario: you are a sole trader in your own right, but you also own a limited company that pays you dividends. Those dividends come from your company's post-tax profits. You report them on your personal tax return (or final declaration under MTD ITSA).

The quarterly reporting rules are the same. Dividends from your own company are not self-employment income. They do not go into quarterly updates. They go onto the final declaration only.

But be careful. If you are a director of that company, your salary from the company is employment income (PAYE). That also stays out of quarterly updates. Only your sole trade or property income triggers quarterly reporting.

If you are unsure whether your income sources trigger MTD ITSA, check the HMRC guidance or speak to your accountant. As ICAEW qualified accountants, we see many business owners with mixed income streams, and the rules are not always intuitive.

Penalties for Late MTD ITSA Submissions

HMRC is introducing a new points-based penalty system for MTD ITSA. Each late submission (quarterly update, EOPS, or final declaration) earns you a penalty point. Accumulate enough points and you get a financial penalty. The points reset after a period of compliance.

For quarterly updates, you get one point per late submission. Reach four points and you face a £200 penalty. For the EOPS and final declaration, the thresholds are different. The system is designed to be more forgiving than the current self assessment late filing penalties, but it still requires discipline.

Dividend income does not trigger separate penalties because it is not a quarterly submission. But if you file your final declaration late, you face penalties on the whole return, including the dividend section.

Practical Steps to Prepare for MTD ITSA

If you are a sole trader with dividend income, here is what to do now:

1. Check your income level. Add your self-employment profit to your dividend income. If the self-employment element alone is over £50,000, you are in scope from April 2026. If it is between £30,000 and £50,000, you are in scope from April 2027. Between £20,000 and £30,000, from April 2028.

2. Get MTD-compatible software. If you are not already using digital bookkeeping, now is the time. Xero and FreeAgent are the most common choices for sole traders. Both are MTD-compatible. QuickBooks Self-Employed is also an option. Your accountant can help you choose.

3. Organise your dividend records. Keep a simple spreadsheet or use your software to record dividends received each tax year. Note the date, company name, and amount. This makes the final declaration straightforward.

4. Speak to your accountant. If you are not sure whether your income sources trigger MTD ITSA, or how to handle mixed income, book a call. The rules are new and getting them wrong means penalties.

We cover MTD ITSA in detail on our VAT and Making Tax Digital blog section. For broader guidance on sole trader tax, see our Sole Trader and Self Employment articles.

Key Takeaways

  • MTD ITSA requires quarterly digital updates for self-employment income only.
  • Dividend income from a separate share portfolio does not need quarterly reporting.
  • Dividends go onto the annual final declaration, alongside all other non-trading income.
  • The £500 dividend allowance and tax rates (8.75%, 33.75%, 39.35%) remain unchanged under MTD ITSA.
  • If you are above the threshold, you must use MTD-compatible software from April 2026.
  • Penalties apply for late submissions, but only on the parts of the return that require quarterly updates.
  • Voluntary adoption is possible if your income is below the threshold.

For advice specific to your situation, speak to a qualified accountant. Our team at Holloway Davies can help you prepare. Contact us to discuss your MTD ITSA readiness.