What Is Making Tax Digital for Income Tax?
Making Tax Digital for Income Tax (MTD for ITSA) is HMRC's programme to replace the annual self assessment tax return with a digital, quarterly reporting system. From April 2026, sole traders and landlords with qualifying income over £50,000 must keep digital records and submit quarterly updates to HMRC using MTD-compatible software.
The threshold drops to £30,000 from April 2027, and to £20,000 from April 2028. If you are a sole trader with a separate portfolio of shares paying dividends, the key question is: do those dividends count towards the £50,000 threshold, and do you need to report them in your quarterly updates?
The short answer is yes on both counts, but the detail matters. As ICAEW qualified accountants, we work through the specific rules below.
What Counts as "Qualifying Income" for the MTD Threshold?
HMRC defines qualifying income as the total of your self-employment income and property income (before deducting expenses). Dividends from shares held personally do not count as self-employment or property income. They are investment income, taxed under different rules.
However, if you are a sole trader and you also receive dividend income from a separate share portfolio, you need to look at two separate questions:
- Does your self-employment income alone exceed £50,000? If yes, you are mandated for MTD for ITSA regardless of your dividends.
- Does your property income alone exceed £50,000? Same rule applies.
- If neither exceeds £50,000 individually, but the total of self-employment plus property income does, you are still mandated. HMRC aggregates the two sources for the threshold test.
Dividends do not count towards the £50,000 qualifying income threshold. So if your self-employment profit is £40,000 and your dividends are £15,000, your qualifying income is £40,000. You are below the threshold and not mandated (unless you are in the £30,000 or £20,000 phase-in years).
But here is where it gets specific: once you are mandated for MTD for ITSA, you must report all your income sources in your quarterly updates and annual end-of-period statement. That includes dividends.
What Do Quarterly Updates Cover for a Sole Trader With Dividends?
Your quarterly updates are summaries of your income and expenses for each quarter. They are not a full tax return. HMRC uses them to build a running picture of your tax position.
For a sole trader, the quarterly update covers your self-employment income and expenses. If you also have property income, that is included too. But dividends from shares held personally are not part of the quarterly update. They are reported only in the annual end-of-period statement (EOPS).
This is a critical distinction. Many sole traders with a share portfolio assume they must report dividends every quarter. You do not. You report them once a year in the EOPS, alongside any other income not covered by quarterly updates, such as bank interest, savings income, and capital gains.
So your quarterly updates will only show your self-employment figures. Your dividends sit outside those updates until the year-end.
What About Dividends Received Through Your Business?
If you are a sole trader, you cannot receive dividends through your sole trade. Dividends are a distribution of company profits. You can only receive them if you own shares in a limited company. As a sole trader, you are not a limited company, so any dividends you receive are personal investment income.
If you operate as a limited company director and also have a sole trade on the side, that is a different structure. The dividends from your limited company are personal income, not business income. The same rule applies: they are reported in your EOPS, not in quarterly updates.
If you are considering incorporating your sole trade to take advantage of dividend tax rates, the MTD rules change again. As a director, you would file corporation tax returns (CT600) digitally, not MTD for ITSA quarterly updates. But the dividends you pay yourself would still be personal income reported on your self assessment.
How to Record Dividends Under MTD for ITSA
When you complete your annual end-of-period statement, you will need to declare your total dividend income for the tax year. This includes:
- Dividends from UK companies (including those received through a nominee or ISA wrapper, though ISA dividends are tax-free and not reported)
- Dividends from foreign companies
- Dividends from your own limited company if you are also a director
- Dividends from unit trusts or OEICs
The annual dividend allowance for 2025/26 is £500. Dividends above that are taxed at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate). Your MTD-compatible software should calculate the tax due based on your total income, including dividends, after the EOPS is submitted.
You do not need to provide a breakdown of each dividend payment. A single total figure for the year is sufficient. But HMRC may ask for supporting evidence, so keep your dividend vouchers and bank statements.
What Software Do You Need?
MTD for ITSA requires you to use HMRC-recognised software for your quarterly updates and EOPS. Spreadsheets are allowed, but they must be linked to bridging software that sends the data to HMRC. Most cloud accounting packages already support MTD for ITSA, including Xero, QuickBooks, FreeAgent, and Sage Accounting.
If you use a separate software for your share portfolio, such as a trading platform or a portfolio tracker, you will need to export your dividend totals and enter them into your MTD-compatible software at year-end. Some platforms, like Hargreaves Lansdown and AJ Bell, provide annual tax certificates showing your dividend income, which you can use for the EOPS.
If you are not yet mandated but want to prepare, you can speak to our team about setting up MTD-compatible records now. The transition is smoother if you are already using digital bookkeeping.
What Happens If You Get It Wrong?
HMRC has announced a light-touch penalty regime for the first year of MTD for ITSA. But that does not mean you can ignore the rules. If you are mandated and fail to submit quarterly updates or your EOPS, you risk penalties starting at £200 per missed update, escalating with repeated failures.
For a sole trader with a share portfolio, the most common mistake is forgetting to include dividends in the EOPS. Because dividends are not part of the quarterly updates, it is easy to overlook them at year-end. Make a note in your calendar to gather your dividend statements when you prepare your EOPS.
Another common error is reporting dividends in the quarterly updates. This creates a mismatch in HMRC's records and may trigger queries. Stick to the rule: quarterly updates for self-employment and property only, EOPS for everything else.
Practical Steps for a Sole Trader With Dividend Income
Here is a simple checklist to follow:
- Check your qualifying income. Add your self-employment profit and property income. If the total is over £50,000, you are mandated from April 2026. If over £30,000, from April 2027. If over £20,000, from April 2028.
- Choose your software. Make sure it supports MTD for ITSA and can handle both quarterly updates and EOPS. Most cloud packages do.
- Set up digital records for your sole trade. You need to record each sale and expense digitally, either in software or a spreadsheet with bridging software.
- Submit quarterly updates. These cover your self-employment income and expenses only. Do not include dividends.
- At year-end, gather your dividend income. Use your annual tax certificate or bank statements to get the total.
- Submit your EOPS. This includes your self-employment final figures plus all other income, including dividends, bank interest, and capital gains.
- Pay your tax. HMRC will calculate the total tax due based on the EOPS. Payment dates remain the same: 31 January and 31 July.
If you are unsure whether your dividend income affects your MTD obligations, get in touch with our team. We can review your specific situation and confirm whether you are mandated, and what you need to report.
What About Capital Gains on Shares?
Capital gains from selling shares are not part of MTD for ITSA either. They are reported on your self assessment, and from 2026/27, you will report them in your EOPS alongside dividends. But they are not included in quarterly updates.
If you sell shares during the year, keep a record of the disposal proceeds and acquisition cost. You will need these figures for your EOPS. The annual CGT exemption for 2025/26 is £3,000. Gains above that are taxed at 18% (basic rate) or 24% (higher rate) for residential property, and 18% or 24% for other assets including shares.
For UK residential property gains, you must report and pay the tax within 60 days of completion. That is separate from MTD for ITSA and uses the 60-day CGT property return form.
Summary
Making Tax Digital for Income Tax does not change how dividends are taxed. It changes how you report them. For a sole trader with a share portfolio, your quarterly updates cover only your self-employment income. Your dividends are reported once a year in the end-of-period statement.
The key numbers to remember: £50,000 threshold for 2026, £30,000 for 2027, £20,000 for 2028. Dividends do not count towards those thresholds. But once you are mandated, all your income sources must be reported digitally, including dividends.
If you need help setting up your MTD-compatible records or understanding how your dividend income fits into the new system, our ICAEW qualified team can guide you through it.