Under Making Tax Digital for Income Tax (MTD For IT), you record income and expenses under a fixed set of HMRC headings, the MTD income and expense categories, reported separately for each business you run. These headings cover both trading and property income, and using the right one is what keeps your digital records compliant and your profit calculation defensible if HMRC asks a question.
Under MTD IT, each business activity (all UK rental properties count as one business, all overseas properties count as another, and each trade is separate again) is reported on its own set of categories. This guide covers every trading and property category HMRC uses, plus the specific rule that trips up most landlords: how residential mortgage interest is categorised (it isn't a normal expense; see the worked example).
What Should Be Included in Trading Income and Expenses for Making Tax Digital?
The following outlines the income and expense headings relevant to trading income and expenses under Making Tax Digital for Income Tax. Please note that all amounts should be reported separately for each business.
Business Income
Business income falls into two parts: turnover from your core trade, and other business income. Each is itemised separately so the source of every pound is clear.
Turnover
Turnover refers to the total sales or revenue generated by a business from its core trading activities before any deductions are made for expenses. This figure includes all amounts earned from selling goods or providing services to customers during the accounting period.
It is crucial to keep accurate records of all sales invoices and receipts to support the declared turnover figure, as this forms the basis for calculating profit and ultimately, the amount of tax due. It includes:
Sales of goods produced or bought for resale
Fees earned from professional or consultancy services
Income received for work done or services rendered during the accounting period
Note: Maintaining a clear audit trail of these records is essential, as turnover figures are the primary input in tax calculations and compliance reviews
Other Business Income
It encompasses all additional income streams that are not directly related to the main trade or core business activities. Such income should be itemised separately from turnover, allowing for clear distinction and transparency in financial reporting.
Properly categorising other business income ensures compliance with Making Tax Digital for Income Tax (MTD IT) requirements and provides a more accurate picture of the business's financial health.
Examples include:
Commissions or referral fees
Income from rent of business assets or equipment
Insurance recoveries for lost stock or compensation related to business activities
Grants, subsidies, or business support payments
Note: By itemising these separately, businesses ensure transparent reporting and provide a complete picture of all income sources under MTD ITSA.
Business Expenses
When reporting business expenses, the following categories should be used:
Direct costs of trading
Direct trading costs are what you spent to produce or buy the goods or services you sold, separate from running costs like rent or admin.
Cost of goods bought for resale
This refers to the purchase price of items intended to be sold directly to customers, as well as any raw materials or components used in the production of goods for sale.
It Covers all costs associated with employing staff, including:
purchases of finished goods,
raw materials and consumables used in manufacturing,
freight and import duties on stock
Note: Accurate stock records are crucial to calculate cost of goods sold, which directly impacts taxable profits.
Construction industry: subcontractor payments
It includes payments made to subcontractors for work carried out on construction projects, such as building, renovation, or specialist services within the industry.
It Covers:
labour and specialist trades (electrical, plumbing, roofing, groundwork)
renovation, demolition
Note: Record CIS deductions separately so it reconciles with your monthly CIS return to HMRC (it isn't part of your own expense figure).
Staff and Premises
Wages, Salaries and other staff costs
It covers all payments to employees, including salary, wages, bonuses, pensions, and other staff benefits, as well as employer National Insurance contributions.
It Covers all costs associated with employing staff, including:
Salaries, hourly wages, overtime, and bonuses
Employer's National Insurance contributions
Pension contributions and staff benefits
Holiday pay, sick pay, or redundancy payments
Note: Comprehensive payroll records must be maintained for verification during compliance checks.
Rent, rates, power and insurance costs
It Includes rent payments for business premises, local authority rates, utility bills (such as electricity and water), and insurance premiums covering property and business risks.
It Covers property-related operational costs such as:
Rent of business premises
Business rates and council charges
Utilities (electricity, gas, water, and waste disposal)
Insurance policies
Note: Where premises are used partially for private purposes, a fair apportionment should be made.
Repairs and maintenance of property and equipment
It includes the expenses related to keeping property and equipment in working order, such as fixing faults or servicing machinery, but excluding significant upgrades or improvements.
Note: Capital improvements or upgrades that enhance value should not be included here but treated as capital expenditure.
Running the business day to day
Car, van and travel expenses
It encompasses costs for business-related travel using cars, vans, or other means, such as fuel, maintenance, public transport and parking.
It includes expenditure on travel and transport necessary for business operations:
Fuel, servicing, repairs, and insurance for business vehicles
Hire or lease costs for vans or company cars
Parking, tolls, public transport, and business mileage (excluding home-to-work travel)
Note: Accurate mileage logs should be kept distinguishing between personal and business use.
Phone, fax, stationery and other office costs
It covers communication expenses (including phone and fax), stationery, postage, printing, and other supplies necessary for running the office.
It covers general office administration expenses such as:
Telephone, fax, and internet services
Postage, stationery, and printing supplies
Subscriptions for software, licenses, and office consumables
Advertising
It includes spending on promoting goods or services, such as online adverts, newspaper listings, flyers, billboards, or sponsorships.
It Includes expenditure on promoting the business and attracting customers:
Digital and print advertising (Google Ads, newspapers, magazines)
Sponsorships, trade shows, and public events
Website hosting, branding, and promotional materials
Note: Advertising costs that promote the business are allowable, but those with a personal benefit (e.g., personal gifts) are not.
Business entertainment costs
It refers to the costs incurred when entertaining clients or business contacts, such as meals, events, or tickets to shows. Note that some of these expenses may have limited tax deductibility.
Note: However, these are usually not deductible for tax purposes but still must be recorded to maintain complete financial transparency.
Finance and Professional costs
Interest on bank and other loans
It comprises the interest paid on borrowings from banks or other lenders for business purposes, excluding repayments of the loan principal.
Bank, credit card and other financial charges
It refers to the charges incurred for banking services, credit card processing, overdraft facilities, or other financial transactions related to the business.
It covers:
Bank account maintenance fees
Credit card processing and transaction charges
Charges for currency exchange, overdrafts, or loan administration
Accountancy, legal and other professional fees
It refers to the payments made for professional advice and services, including accountants, solicitors, consultants, and other experts supporting the business.
It includes payments made for professional support and advice:
Accountants, auditors, and tax advisors
Solicitors and legal representatives
Consultants or business advisors
Note: Professional fees directly connected to business operations are allowable; personal legal costs are not.
Other business expenses
It Includes miscellaneous costs necessary for running the business, which do not fit into the specified categories, such as subscriptions or training.
It includes miscellaneous allowable costs necessary for running the business:
Staff training, professional memberships, and trade subscriptions
Small equipment purchases, uniforms, or safety gear
Costs not captured under other specific headings but wholly business-related
Note: Any adjustments for disallowable expenses may be made as part of the year-end finalisation process. Whether a cost is allowable in the first place depends on the wholly and exclusively rule rather than which heading it sits under.
Our guide to allowable expenses explains which costs qualify and which are disallowed.
How Can You Categorise Property Income and Expenses Under MTD for Income Tax?
The income and expense headings for property income under MTD are set out below. Full details can be found in the Update notice, specifically in the property income section. As with trading income, adjustments for disallowable expenses may be made during the year-end finalisation process.
Property income must also be categorised accurately, with separate reporting for UK and foreign property. Each type of property business (furnished holiday lets, residential, commercial) should be reported distinctly.
UK Property Income
UK property income should be reported with separate totals for the following items:
Total rent received
This refers to the complete amount of rent payments collected by a landlord or property owner from tenants during the relevant accounting period. It includes all periodic rental payments for the use of a property, before the deduction of any expenses or costs, and regardless of whether the rent is paid weekly, monthly, quarterly, or annually.
Other income derived from property
This covers additional income streams associated with the property that are not strictly rent. Examples include charges to tenants for services such as cleaning, maintenance, parking fees, or use of communal facilities, as well as income from advertising space or granting access rights. Essentially, it encompasses any revenue generated from the property aside from standard rent payments.
Premiums for the grant of a lease
This is a lump sum payment received by the landlord in exchange for granting a new lease or extending an existing lease to a tenant. Unlike regular rent, a premium is typically paid upfront at the beginning of the lease term and can relate to both commercial and residential properties. This income is taxable and must be allocated appropriately between capital and revenue portions depending on lease duration.
Reverse premiums and inducements
Reverse premiums are sums paid by a landlord (or sometimes a tenant) as an incentive to encourage another party to enter into a lease agreement or to vacate a property. Inducements can include cash payments, rent-free periods, or contributions towards tenant fit-out costs. These are generally offered to attract tenants to take on a lease or to persuade an existing tenant to surrender their lease early.
UK Property Expenses
UK property expenses follow a fixed set of HMRC headings, most of which are straightforward:
Rent, rates, insurance and ground rents
This refers to the regular payments made for leasing a property (rent), local authority charges such as council tax or business rates (rates), insurance premiums to protect the property against risks, and ground rents which are payments made by leaseholders to the freeholder of the land on which the property stands.
Property repairs and maintenance
These are costs incurred to keep the property in good working condition, including fixing faults, carrying out routine maintenance, and replacing worn-out items, but not improvements which enhance the value of the property.
Non-residential property finance costs
Interest and other financial charges associated with loans or mortgages taken out for commercial or non-residential properties, such as shops, offices, or warehouses.
Residential property finance costs
Interest and financial charges on loans or mortgages related to residential properties, such as houses or flats. These costs are subject to specific tax restrictions.
Residential finance costs brought forward
Any residential property finance costs from previous accounting periods that were not fully utilised or claimed and are carried forward to be deducted against future income.
These finance costs cannot be deducted from rental profit in the way other expenses are. Under section 272A of ITTOIA 2005 the deduction is restricted, and relief is instead given as a reduction in tax at the basic rate of 20 per cent under section 274A, applied after the profit has been calculated.
Legal, management and other professional fees
Fees paid for professional services associated with the property, including solicitors for legal matters, property managers for day-to-day administration, accountants, and other consultants.
Costs of services provided, including wages
Expenditure on services offered to tenants, such as cleaning, gardening, security, or concierge, as well as wages paid to staff employed to provide these services.
Travel expenses
Costs incurred for travel relating to the management or maintenance of the property, for example, visiting the property or meeting with tenants or contractors.
Other allowable property expenses
Any additional expenses that are permitted under tax rules, such as advertising for tenants, phone calls, stationery, or utility bills paid by the landlord.
Foreign Property Income
Foreign property income should be presented with separate totals for the following:
Total rents received This refers to the entire amount of rental income collected from tenants for letting out property during a specified period, before deducting any expenses or costs associated with the property. |
Other income from property This covers any additional earnings related to the property that are not part of the standard rent. Examples might include income from parking fees, service charges paid by tenants, or payments for the use of communal facilities. |
Premiums for the grant of a lease This is a lump sum payment made by a tenant to a landlord in exchange for being granted a lease on a property, often at the beginning of the lease term. It is separate from regular rental payments. |
Foreign Property Expenses
Foreign property expenses mirror the UK property list almost exactly:
Rent, rates, insurance and ground rents These are regular payments made by the landlord in relation to the property. Rent refers to amounts paid for the use of land or buildings. Rates are local authority charges, such as property taxes. Insurance covers the cost of insuring the property against risks like fire or damage. Ground rents are fees paid to the owner of the land on which a property is built. |
Property repairs and maintenance Expenses incurred to keep the property in good condition, including fixing damage, servicing equipment, and general upkeep. This does not include improvements or additions that increase the value of the property. |
Non-residential property finance costs It includes the interest and finance charges related to loans or mortgages taken out for non-residential properties, such as commercial buildings, offices, or shops. |
Residential property finance costs It includes the interest and finance charges on loans or mortgages for residential properties, such as houses or flats let to tenants. The same restriction applies to foreign residential property. Under section 272A of ITTOIA 2005 the finance costs are not deducted from rental profit, and relief is given instead as a basic rate tax reduction under section 274A. |
Unused residential finance costs brought forward Finance costs relating to residential properties that could not be used to offset rental income in previous tax periods and are carried forward to be claimed in future periods. |
Legal, management and other professional fees It includes the fees paid for professional services connected to the property, including solicitors, letting agents, accountants, and surveyors. |
Costs of services provided, including wages It refers to the expenditure on services offered to tenants or for the upkeep of the property, such as cleaning, gardening, security, and wages paid to staff performing these services. |
Travel expenses It encompasses costs incurred for travel related to managing or maintaining the property, such as visiting the property for inspections, repairs, or meeting tenants. |
Other allowable property expenses Any additional expenses permitted under tax rules that relate to the running or maintenance of the property, such as advertising for tenants, phone calls, stationery, or utility bills paid by the landlord. |
Worked Example
A landlord with two UK residential rental properties receives combined rent of £9,600 for the quarter. During the same quarter she pays £180 buildings insurance, £320 in letting agent fees, £150 for a boiler repair, and £1,100 in mortgage interest on her buy-to-let mortgages.
What she paid | HMRC category | Deducted from this quarter's profit? |
|---|---|---|
£9,600 rent received | Total rent received | Income, not a deduction |
£180 buildings insurance | Rent, rates, insurance and ground rents | Yes |
£320 letting agent fees | Legal, management and other professional fees | Yes |
£150 boiler repair | Property repairs and maintenance | Yes |
£1,100 mortgage interest | Residential property finance costs | No, 0% deductible since 2020/21 |
Her quarterly profit before finance-cost relief is £9,600 minus £180, minus £320, minus £150, which equals £8,950. The £1,100 interest doesn't reduce that figure at all. Instead, it qualifies for a 20% basic-rate tax reduction under section 274A ITTOIA 2005, worth £220, which comes off her tax bill at Final Declaration, not off this quarter's profit.
The mistake we see most often is categorising the full £1,100 as a normal expense and deducting it from profit, which understates her taxable income and, if HMRC picks it up, means a correction plus interest on the underpaid tax.
These figures are illustrative. Your own position depends on your specific income, expenses, and finance costs.
What Happens at Year-End Finalisation?
Adjustment | What it does |
|---|---|
Disallowable expenses | Removes any private-use portion or non-business cost that slipped into a quarterly category |
Capital allowances | Claims relief for qualifying plant and equipment, separately from the repairs and maintenance category |
Brought-forward losses | Sets prior-year trading or property losses against this year's profit |
Residential finance-cost reduction | Applies the 20% basic-rate reduction (s.274A) for any residential finance costs excluded during the year |
Nothing here changes which category a transaction sits in; categorisation happens quarter by quarter, and finalisation is where the categorised totals get adjusted into a tax figure.
Common MTD Categorisation Mistakes to Avoid
Deducting full mortgage interest as an expense. The single most common error; see the worked example above.
Mixing UK and foreign property into one business. HMRC treats them as two separate property businesses with separate categories; combining them is a compliance error, not just a tidiness issue.
Recording a capital improvement as a repair. A new kitchen is capital expenditure; fixing the existing one is a repair. Only one of those goes under "property repairs and maintenance."
Including home-to-work travel in car and van expenses. Ordinary commuting isn't a business cost, even if you also inspect a rental property that day.
Skipping the digital record for cash transactions. MTD requires a digital record of the amount, date and category for every transaction, including ones outside your bank feed.
Conclusion
Getting your MTD income and expense categories right from day one is what separates a smooth quarterly update from one that triggers an HMRC query. Set your bookkeeping up around these headings from the start of the accounting period rather than sorting transactions retrospectively, and keep UK trading, UK property, and foreign property in entirely separate records so each business reconciles cleanly.
The category that catches most landlords out is residential finance costs. Treat mortgage interest as a normal expense and you'll understate your profit. If your situation involves restricted finance costs, capital allowances, or brought-forward losses, those are worth confirming with an adviser before you finalise.
