What income is excluded from Making Tax Digital for Income Tax?

Understanding the question: what does “income excluded” mean in Making Tax Digital for Income Tax?

Making Tax Digital for Income Tax (often shortened to “MTD for Income Tax” or “MTD IT”) is a UK tax administration change that affects how many people report certain types of income to HM Revenue & Customs (HMRC). Instead of relying mainly on an annual Self Assessment tax return, MTD introduces digital record keeping and periodic reporting (with an end-of-year finalisation) for specific categories of income. When people ask, “What income is excluded from Making Tax Digital for Income Tax?”, they are typically asking which types of money you receive are not within the scope of those new digital record-keeping and quarterly update obligations.

It is important to separate two ideas that often get mixed up:

First, “excluded income” does not necessarily mean “tax-free income.” Some excluded income is still taxable, but it may be reported through a different system, under different rules, or by different taxpayers. Second, “excluded from MTD for Income Tax” does not automatically mean you do nothing; you may still have to keep records, submit forms, or file a Self Assessment tax return depending on your circumstances.

At a high level, MTD for Income Tax focuses on trading income (self-employment) and property income (UK and overseas property), where individuals and some landlords will keep digital records and send periodic updates using compatible software. Many other income sources remain outside this specific MTD regime, either because they are handled through PAYE, taxed at source, reported by third parties, or governed by separate tax reporting frameworks.

How MTD for Income Tax defines what is “in scope”

To understand what is excluded, it helps to understand what is in scope. MTD for Income Tax is primarily about income that is currently declared on the Self Assessment tax return under the categories of self-employment and property. That generally means:

Self-employment (trading) income, such as income from running a business as a sole trader, including many kinds of freelance and professional activities.

Property income, such as income from letting property, whether residential or commercial, and potentially including overseas property income (depending on the framework applied).

Where individuals have these income sources, and they meet the relevant thresholds and conditions, MTD requires digital record keeping and periodic submissions. The exact mechanics (for example, how quarterly updates work, and how end-of-year finalisation is handled) are part of the MTD framework. But the key point for this article is that the universe of “MTD income” is not “all income you receive.” It is a defined set of income streams that align with business and property reporting.

Therefore, income can be “excluded” for two broad reasons:

It is not trading or property income (for example, wages under PAYE).

It is trading or property-related but carved out because it is taxed, reported, or administered through different rules or because the taxpayer is outside the scope (for example, certain entities, certain types of activity, or particular kinds of arrangements).

Employment income under PAYE: a major category typically outside MTD for Income Tax

For most employees, employment income is handled through Pay As You Earn (PAYE). Your employer reports pay and tax information to HMRC, deducts Income Tax and National Insurance contributions where relevant, and issues payslips and end-of-year summaries. Because PAYE already relies heavily on digital reporting by employers, and because the employee is not normally responsible for keeping business-style records of wage income and expenses in the same way as a sole trader, employment income is generally outside the MTD for Income Tax digital record-keeping and quarterly update system.

This does not mean that employees never file Self Assessment. Many employees still complete Self Assessment for reasons such as high income, untaxed income, complex benefits, or claimable expenses. But if you only have employment income taxed through PAYE and no property or self-employment income that brings you into MTD, your wage income is not what MTD for Income Tax is aimed at.

Where someone has both employment income and self-employment/property income, MTD obligations (if they apply) focus on the in-scope self-employment and property streams. The employment income may still be reported on an annual return or through PAYE reconciliations depending on the broader reporting requirements for that individual.

Pensions and most PAYE-taxed pension income

Pension income often comes through a PAYE-like mechanism, particularly for private pensions and many occupational pension schemes, as well as the State Pension in the context of overall tax calculations. Many pension providers operate PAYE and deduct tax at source where appropriate. As a result, pension income is commonly outside the periodic reporting and digital record-keeping rules that apply to trade and property income under MTD for Income Tax.

However, pension taxation can become complex. Some pension income might not have tax deducted correctly, or the recipient may have additional taxable income, causing a need for Self Assessment. In such cases, the pension income may still be declared annually, but it is not typically the “driver” for MTD for Income Tax obligations. The key distinction is that MTD for Income Tax is designed around business and property record keeping, not around PAYE-managed streams.

Bank and building society interest: often reported to HMRC separately

Interest from banks and building societies is a classic example of income that is not usually treated as in-scope for MTD for Income Tax’s quarterly reporting regime. Banks and building societies routinely provide interest information to account holders and, in many cases, report interest information directly to HMRC. Individuals may still need to declare interest in Self Assessment where required, but the income itself is not “business turnover” or “property rent” and is therefore typically outside the core MTD for Income Tax record-keeping framework.

It is also worth noting that the taxation of interest is affected by personal allowances and the way tax is collected (for example, via PAYE adjustments or Self Assessment). None of these mechanisms depend on the individual keeping digital sales-style records of each interest credit in the same way they would for invoices in a business. That is one reason interest income is usually considered excluded from MTD for Income Tax’s scope.

Dividends from shares and many investment distributions

Dividend income from shares, including dividends from UK companies and distributions from certain investment arrangements, is another category typically excluded from MTD for Income Tax’s quarterly update system. Dividends are investment income, not trading receipts or property rent. Many investors hold shares through platforms that provide annual statements and tax summaries. While dividend income can still be taxable and may need to be declared to HMRC (often via Self Assessment if you exceed allowances or have other reasons to file), it is generally not “in scope” for MTD for Income Tax reporting as it is not part of the core business/property record-keeping model.

Some individuals receive dividends through owner-managed companies where they are also directors or employees. In such cases, the company itself has separate corporation tax reporting responsibilities, and the individual’s dividend income remains an investment distribution from the company rather than sole trader trading income. That separation of tax regimes is another reason dividends are commonly treated as outside MTD for Income Tax obligations.

Capital gains: usually outside MTD for Income Tax quarterly updates

Capital gains arise when you dispose of assets such as shares, investment properties, or other chargeable assets, and you realise a profit relative to your cost basis (subject to tax rules and reliefs). Capital gains tax reporting has its own processes, and certain disposals can trigger specific reporting requirements and timelines separate from Self Assessment. Capital gains do not fit neatly into the MTD for Income Tax model, which is fundamentally about periodic updates of ongoing income and expenses from trade and property.

Therefore, capital gains are typically excluded from MTD for Income Tax quarterly update requirements. You may still need to report gains to HMRC, potentially through Self Assessment, dedicated reporting services, or other means depending on the asset and the reporting rules at the time. But the income stream represented by a capital gain is not the same as a recurring trade or rental income stream and is generally treated as outside MTD’s core record-keeping scope.

Benefits, tax credits, and many state payments

Many state benefits and support payments have their own administrative systems and tax treatments. Some benefits are taxable, some are not, and some are means-tested or otherwise handled outside traditional income tax reporting. As a category, benefits and tax credits are generally not within the MTD for Income Tax quarterly reporting framework because they are not trade or property receipts and because the information flow typically originates from government systems rather than the individual’s business records.

That said, if you have taxable benefits or other payments that require inclusion in a tax return, that does not automatically bring those payments into MTD quarterly updates. It simply means that, if you are filing a return for other reasons, those amounts may form part of your annual tax position.

Income already taxed at source: examples and why it is often excluded

One common theme in excluded income is “taxed at source.” Where tax is deducted before you receive the net amount, or where another party reports the income directly and the tax is handled through withholding mechanisms, HMRC’s rationale for requiring you to keep granular, transaction-by-transaction digital records is weaker. This does not mean the amounts never need to be considered; it means the reporting burden is often placed elsewhere or handled through annual reconciliations rather than periodic digital business updates.

Examples may include certain interest distributions, some foreign income where withholding occurs, and other payments where the payer has a reporting duty. The details vary widely by income type and arrangement, but the broad principle is that MTD for Income Tax is aimed at categories where the taxpayer is the primary record keeper and where the pattern of income and expenses resembles a business ledger.

Company income and corporation tax: excluded because it is a different tax regime

If you operate through a limited company, the company’s profits are subject to Corporation Tax, not Income Tax on self-employment profits. The company’s reporting obligations are separate from your personal Income Tax obligations. While directors and shareholders may have personal income (salary, benefits, dividends) that they must report to HMRC, the company’s business income itself is not the individual’s self-employment income. That means company turnover is generally excluded from MTD for Income Tax because it belongs to the corporate entity and is reported through corporate tax filings and company accounts.

This distinction is crucial because it prevents confusion between “running a business” and “being a sole trader.” MTD for Income Tax is primarily designed for individuals with trading and property income that is taxed directly on them. It is not the same as MTD for VAT or future digital initiatives for corporation tax reporting. If you have both a limited company and personal property income, your personal property income may be relevant for MTD for Income Tax, but the company’s trading receipts remain outside it.

Partnership income: often treated differently from sole trader income

Partnerships can have complex reporting structures, because the partnership itself may file a partnership return, and each partner reports their share of profits on their personal tax return. The MTD for Income Tax framework is heavily focused on individual taxpayers’ trading and property records, but partnership structures introduce shared accounting records and profit allocations. As a result, partnership income is commonly treated differently, and depending on how the rules apply at any given time, some partnerships may be excluded or deferred from MTD for Income Tax requirements.

From the perspective of an individual partner, the “income” you receive may be profit share rather than a stream of invoices and expenses you personally administer. That can be a reason the rules carve partnerships out or treat them through separate onboarding and compliance pathways. If you are a partner in a partnership and you also have sole trader income or property income, it is possible that your sole trader/property income could be in scope for MTD for Income Tax while partnership profit share is handled differently.

Trust income and estate income: commonly excluded from individual MTD obligations

Trusts and estates can generate income and gains that are taxed under regimes that differ from ordinary individual trading or property income. Trustees may have reporting obligations, and beneficiaries may receive distributions and tax vouchers. The structure is not equivalent to a sole trader keeping business records for their own trade. For that reason, trust income and estate income are typically excluded from the individual-focused MTD for Income Tax quarterly update obligations.

Beneficiaries may still have to report trust distributions depending on their overall tax position. But again, the fact that an amount is taxable does not automatically mean it is within the MTD quarterly reporting scope. The governing question is whether the income is part of the trade/property streams that MTD is designed to modernise for individuals.

Employment benefits and expenses: usually handled through PAYE processes

Many employment benefits are handled through PAYE systems, P11D reporting, payrolling of benefits, and other employer-led processes. Where an employer reports and manages taxable benefits, the employee is not generally expected to keep a business ledger of those benefits for MTD for Income Tax purposes. This makes most employer-reported benefits and employment expenses a poor fit for the MTD quarterly update model.

Some employees claim expenses (for example, professional subscriptions or work-from-home expenses) through Self Assessment or separate claims. Even where these claims exist, they are not typically treated as in-scope “business expenses” under MTD for Income Tax unless the employee also has a separate self-employment or property business that is within scope. The record keeping requirements for employment claims remain conceptually distinct from business accounting.

Student loan and other deductions: not an income category and not an MTD focus

People sometimes ask whether items like student loan repayments, pension contributions, or other deductions are “included” in MTD. These are not income categories; they are deductions or adjustments that affect net pay or the calculation of taxable income. MTD for Income Tax is primarily about how you record and report income and expenses for certain activities, not about digitising every possible adjustment that can appear in a tax computation.

If you are within MTD for Income Tax, your quarterly updates are generally about your business and property totals, while your final end-of-year submissions and overall tax return position address reliefs, deductions, and other elements of your tax affairs. Thus, deductions are not “excluded income” because they are not income; they sit elsewhere in the tax workflow.

Property income: when it is in scope, and when certain property-related receipts may still be treated differently

Property income is one of the key areas MTD for Income Tax targets. However, even within property-related receipts, there can be nuance about what constitutes “property business income” versus other receipts. For example, a one-off compensation payment, an insurance payout, or a premium related to a lease can be treated differently from regular rent, depending on the facts and tax rules. The question “excluded income” might, for some landlords, actually be a question about whether certain unusual receipts must be captured in the same digital process as routine rents and expenses.

While the broad category of property income is generally in scope for MTD where the rules apply to the landlord, some specific receipts might be treated as capital rather than income, or they might fall into different reporting categories. In those situations, the “exclusion” is less about MTD itself and more about the underlying tax classification of the receipt. If a receipt is not income for Income Tax purposes, it may be outside the income reporting stream entirely, though it could have capital gains or other implications.

Overseas income: often outside MTD unless it fits the in-scope categories

Overseas income can include overseas employment, foreign pensions, foreign dividends, overseas property rent, and more. The key is not whether the income is overseas; it is the type of income. Overseas dividends and overseas interest generally resemble their UK counterparts and are commonly outside the MTD for Income Tax quarterly update framework. Overseas property income, by contrast, is property income and may align with MTD’s targeted categories, depending on how the rules apply and how the taxpayer is required to report that income.

Foreign income can also involve exchange rates, foreign tax credits, and withholding taxes, which can add complexity. These features often make periodic updates less straightforward. Even so, where overseas property income is treated as part of a property business that is in scope, digital record keeping may be expected. Meanwhile, other foreign income streams are typically excluded because they are investment or PAYE-like income rather than trade/property business receipts.

Self-employment income: what might be excluded even if you are self-employed?

At first glance, self-employment income sounds entirely in scope. But the real world has special cases. Some activities resemble self-employment but are treated differently for tax purposes. Some individuals have income that is classed as trading but collected through platforms or agencies with different reporting. Some have very small or irregular trading income. Some have income that is exempt or covered by allowances. In practice, “excluded income” questions often arise around these edges.

For example, if a person has occasional trading-like receipts but falls below thresholds or meets an exemption, they might not be required to join MTD for Income Tax at that stage. This is not strictly an “income type exclusion” so much as a “taxpayer scope” issue, but it affects the practical answer: the income is not subject to MTD obligations because the person is not required to comply yet.

Additionally, some self-employed people operate through structures such as partnerships or limited liability partnerships, which may not be treated the same as a sole trader. Again, that is less about the income being a different type and more about the legal form changing how reporting works.

Furnished holiday lettings and other specialist property regimes

Historically, certain property activities such as furnished holiday lettings have had distinct tax treatments and rules compared with ordinary property letting. When rules create specialist categories, taxpayers naturally ask whether those categories are treated differently for MTD for Income Tax. In many cases, if the activity is still fundamentally property income for an individual, it sits within the property sphere targeted by MTD. But any special reporting rules, reliefs, or transitional arrangements may mean the way you record and finalise the figures differs from a simple “rent in, expenses out” model.

When people use “excluded” in this context, they may mean “do I have to submit it quarterly in the same way?” The answer often hinges on whether the activity is considered part of property business reporting and whether the taxpayer is within scope. Even when in scope, some specialist adjustments might be handled at end of year rather than in quarterly updates, because quarterly updates are commonly intended to be summaries rather than full tax computations.

Income from savings products and collective investments

Beyond plain bank interest and dividends, people may have income from savings products such as bonds, certain life insurance investment products, unit trusts, OEICs, or other collective investment vehicles. The tax treatment depends on the product: some generate interest-like returns, some generate dividend-like distributions, and some generate gains. Many of these returns are not trade or property income. The reporting of such income is often based on annual tax certificates and platform statements rather than transaction-level record keeping.

As a result, many investment returns from savings products are typically excluded from MTD for Income Tax quarterly updates. They may still feature in your end-of-year tax position, but they do not normally require you to keep MTD-style digital business records of each distribution as if it were a customer invoice.

Cryptoassets and other emerging asset classes

Cryptoassets and other emerging asset classes have become a significant topic in tax reporting. Most commonly, individuals’ tax issues relate to capital gains, and sometimes to income in the form of staking or other rewards. These are not property rents or sole trader turnover in the traditional sense, though there are scenarios where crypto activity could amount to a trade. Because the tax treatment can vary significantly by facts and circumstances, people often wonder whether crypto-related receipts are within MTD for Income Tax.

In general, where crypto activity results in capital gains, it is typically outside MTD for Income Tax quarterly updates as described earlier for capital gains. Where activity generates income-like receipts, it still may not fall within the trade/property categories unless it is truly part of a trading business. For most individuals, crypto-related tax issues are handled through annual reporting or other mechanisms, meaning they are often practically excluded from MTD for Income Tax quarterly reporting obligations. However, if someone is genuinely trading as a business, then the relevant trading income would align with MTD’s focus on business record keeping.

One-off windfalls, gifts, and inheritances

People sometimes worry that MTD means HMRC wants digital reporting of every large bank transfer. That is not what MTD for Income Tax is about. Gifts and inheritances are not generally treated as income for Income Tax purposes in the way wages, rent, or trading profits are. A genuine gift is typically not taxable income for the recipient, and an inheritance is dealt with through inheritance tax rules on the estate rather than as income to the beneficiary.

Because these receipts are not trade/property income and often are not income at all, they are excluded from MTD for Income Tax. That does not mean there are no tax consequences ever; for example, gifts can have inheritance tax implications for the giver, and inherited assets can later give rise to capital gains when sold. But as “income” and as part of MTD quarterly reporting, these receipts are typically outside scope.

Maintenance payments and certain family-related receipts

Some individuals receive maintenance payments or similar family-related transfers. Whether these are taxable can depend on the nature of the payment and the relevant tax rules. However, they are not trade income or property business rent, and they are not part of the MTD for Income Tax design. Therefore, these receipts are generally excluded from MTD for Income Tax quarterly updates.

As with other excluded items, the exclusion is not a declaration that HMRC is uninterested; it is simply that the MTD process is aimed at digitising business-style record keeping and periodic reporting, not capturing every possible personal receipt.

Royalties, licensing, and intellectual property income: sometimes in scope, sometimes not

Royalties and licensing income can fall into different tax categories depending on the source and the arrangement. If you are actively running a business that generates royalties, it may be treated as trading income. If you are simply receiving royalty income from a passive arrangement, it may be taxed differently. This makes royalties a category where the “excluded or included” question can’t be answered purely by the label.

From an MTD perspective, the main question is whether the royalties are part of a self-employment trade or another in-scope business income stream. If you are a sole trader author, musician, designer, or software creator who trades and earns royalties as part of that trade, it may be in scope when you meet the conditions for MTD. If you receive royalties through a company, the corporate receipts remain under corporation tax. If you receive royalties under arrangements that are taxed differently, they may be outside MTD quarterly updates even if they are taxable in some way.

So, royalties are not automatically excluded, but many royalty scenarios people think of are excluded because they are not part of sole trader business income or property income that MTD is aimed at.

How allowances and thresholds affect what is “excluded” in practice

Sometimes the question is not about the nature of the income but about the level of income. Many tax regimes operate with thresholds, and MTD for Income Tax is commonly discussed with reference to income thresholds for joining. If you are below a threshold or qualify for an exemption, you may not be required to follow MTD rules even if your income is of a type that would otherwise be in scope.

This is why people sometimes say “my income is excluded” when what they really mean is “I’m not required to comply yet.” In practice, that distinction matters because it affects planning. If you expect your trading or property income to rise above a threshold, you might treat your current situation as temporary and prepare for digital record keeping sooner rather than later.

Mixed-income taxpayers: what happens when you have both excluded and in-scope income?

Many individuals have multiple income sources: an employed job, a small side business, some rental income, and perhaps dividends or savings interest. In those situations, it is common to worry that joining MTD for Income Tax means you must send quarterly updates for everything. Typically, that is not the case. The MTD quarterly update obligation is associated with the in-scope business and property categories. Your excluded income streams do not suddenly become “quarterly reportable” just because you have a side trade.

However, the overall process of finalising your tax position at the end of the year may still require you to include all relevant income sources in your annual declarations. The practical implication is that you may end up using MTD-compatible software for your in-scope records and updates while still using year-end information (such as P60s, dividend vouchers, interest statements, and pension statements) to complete the annual finalisation. The software experience may feel more integrated, but conceptually the excluded income is still excluded from quarterly updates.

Common misconceptions about excluded income

A frequent misconception is that “excluded” means “HMRC doesn’t tax it.” As discussed, excluded income can still be taxable. Another misconception is that “excluded” means you never have to declare it. In reality, you may have to declare excluded income in Self Assessment or through other mechanisms depending on your overall circumstances and the applicable rules.

Some people also assume that MTD for Income Tax replaces Self Assessment completely. In practice, MTD is better thought of as a way of changing record keeping and periodic reporting for specific income streams, while still requiring end-of-year finalisation and comprehensive reporting of your tax affairs. Exclusions exist because not all income fits the business/property ledger model, not because those income streams are irrelevant.

Practical examples of excluded income scenarios

Consider an employee who earns a salary and also has a modest portfolio generating dividends and bank interest. Their salary is handled through PAYE, and their investment income is typically recorded through annual statements. Unless they have sufficient self-employment or property income that brings them into MTD, their income is largely outside MTD for Income Tax. Even if they file Self Assessment due to dividend levels, the quarterly digital business update model does not apply.

Now consider a sole trader graphic designer who also has a part-time employed role. The designer’s self-employment income is in the category MTD targets, while their employment income remains PAYE-based. The practical “excluded income” is the employment wages; they are still part of the overall tax picture, but not part of the quarterly business update stream.

Finally, consider a landlord who receives rental income and also sells shares at a profit. Rental income aligns with MTD’s property category, while the share sale produces a capital gain. The gain is typically excluded from MTD quarterly updates even though it may need to be reported in the appropriate way. The landlord’s property records are central to MTD; their investment disposal is not.

What to do if you are unsure whether a particular income type is excluded

If you are uncertain, a useful approach is to classify the income into one of these buckets:

Trading income: money from selling goods or services as a sole trader or similar individual business activity.

Property income: money from letting property.

PAYE-managed income: wages, many pensions, and employer-managed benefits.

Investment income: interest, dividends, and many investment distributions.

Gains: capital gains from disposals.

Other taxable income: miscellaneous categories that may be taxable but do not behave like trade or property receipts.

Once you identify the bucket, you can usually tell whether it fits the MTD for Income Tax design. Trading and property are the centre. PAYE and investment income are commonly excluded from quarterly reporting. Gains are usually excluded. The “other” category is where you might need to look closer at tax classification, because some receipts that feel personal can still be taxed in specialised ways.

Also consider whether the question is really about your status rather than the income. If you do not meet the conditions for MTD yet, your in-scope categories may be practically excluded for now, even though they would not be excluded for someone above the relevant thresholds or without an exemption.

Record keeping for excluded income: good habits still matter

Even if an income source is excluded from MTD for Income Tax quarterly updates, it is still wise to keep organised records. Annual tax reporting often relies on documents provided by employers, pension providers, banks, investment platforms, and other institutions. Having a clear folder structure and saving digital copies of statements can reduce stress at year end. For excluded income like dividends and interest, an annual tax summary from your platform might be enough. For capital gains, keeping acquisition and disposal documents can be essential.

Good record keeping also helps if HMRC queries an amount or if you need to amend a return. Exclusion from MTD does not protect you from the need to evidence figures, especially where you have complex investments or multiple income streams.

Conclusion: excluded income is mostly about category and reporting pathway

When you ask, “What income is excluded from Making Tax Digital for Income Tax?”, the most practical answer is that MTD for Income Tax is chiefly concerned with trading (self-employment) and property income where the taxpayer is responsible for keeping business-style records. Many other common income sources are excluded from the MTD quarterly update and digital record-keeping obligations because they are handled through PAYE, taxed or reported at source, administered through other regimes, or simply do not fit the trade/property model.

Typically excluded categories include employment income, many pensions, most bank interest, dividends, capital gains, many benefits and state payments, and company income that falls under corporation tax. More specialised categories such as partnership profit shares, trust distributions, and certain royalties may also be excluded or treated differently depending on structure and classification. If you have a mix of income, joining MTD for Income Tax does not usually mean every income stream becomes a quarterly reporting obligation; instead, it means the in-scope trade and property categories are managed through digital records and periodic updates, while excluded income remains dealt with through the appropriate annual or alternative reporting routes.