Making Tax Digital for Income Tax (MTD for ITSA) is coming. If you are an agency founder drawing dividends from your own company, the way you record those dividends is about to change. It is not just about declaring the total on your tax return any more. HMRC will expect to see digital records of each dividend payment, held in compatible software, and submitted quarterly.
This article covers exactly what you need to track for digital records dividends MTD agency compliance, how to store those records, and what happens if you do not get your record-keeping in order before the deadlines.
What Is MTD for ITSA and Why Does It Affect Dividends?
MTD for ITSA (Making Tax Digital for Income Tax Self Assessment) is HMRC's programme to digitise the tax system. From April 2026, sole traders and landlords with qualifying income over £50,000 must keep digital records and submit quarterly updates. From April 2027, the threshold drops to £30,000.
If you are an agency director drawing dividends, those dividends count as income for MTD purposes. You cannot just note them on a spreadsheet and submit a figure at year-end. You need a digital record of each dividend, held in MTD-compatible software, and included in your quarterly updates.
This is a significant shift. Many agency founders treat dividends as a simple director's decision: vote a dividend, transfer the money, move on. Under MTD, that approach will not satisfy the record-keeping requirements.
What Counts as a Dividend for MTD Purposes?
Dividends paid by a UK company to its shareholders count as income for the individual recipient. For MTD for ITSA, you must record:
- Each dividend payment you receive from your agency (or any other company)
- The date of the dividend payment
- The gross amount of the dividend (before any tax taken off, though UK dividends typically come without tax deducted)
- The type of dividend (interim or final)
- The company paying the dividend
This applies whether you are taking a regular monthly dividend, a quarterly top-up, or a single year-end distribution. Every payment must be recorded digitally.
What About Dividends from an Investment Portfolio?
If you hold shares in other companies outside your agency, those dividends must also be recorded. The same rules apply. HMRC does not distinguish between dividends from your trading company and dividends from a passive investment portfolio. Both are income for MTD purposes.
What Software Can You Use for Digital Records of Dividends?
Not all accounting software is MTD-compatible. You need software that HMRC has approved for MTD for ITSA submissions. The major players are already on board:
- Xero, fully MTD-compatible, handles dividend recording through its transactions feed
- QuickBooks, MTD-ready, with dividend categorisation built in
- FreeAgent, popular with agency founders, MTD-compatible, includes dividend tracking
- Sage, MTD-ready, though the interface varies by product
If you are using a spreadsheet to record dividends and manually entering figures into your tax return, that will not work under MTD. Spreadsheets are not MTD-compatible unless they are linked to bridging software that submits the data to HMRC. Most agency founders will find it simpler to move to proper accounting software.
Working exclusively with agency founders, we typically recommend Xero or FreeAgent for agency clients. Both handle dividend recording cleanly and integrate with your bank feed, so the transaction arrives in the software automatically. You then categorise it as a dividend, add the relevant details, and the record is stored digitally.
What Information Must Your Digital Record Contain for Each Dividend?
For each dividend payment you receive, your digital record must include:
- Date of payment, the date the money lands in your personal account
- Gross amount, the full dividend before any notional tax credit (which no longer exists for most dividends, but the gross figure is still what you report)
- Company name, the legal entity paying the dividend
- Dividend type, interim or final
- Dividend voucher reference, if your company issues dividend vouchers, the voucher number or a reference to it
You also need to record the tax deducted at source, if any. For most UK dividends, there is no tax deducted. But if you receive dividends from overseas companies, there may be withholding tax. That must be recorded too.
Do You Need to Record the Dividend Voucher Itself?
The digital record is the data, not the scanned document. You do not need to upload a PDF of the dividend voucher to your software. But you should keep the voucher as a supporting document. If HMRC queries a dividend entry, you need to be able to produce the voucher showing the board resolution, the date, and the amount.
Keep dividend vouchers in a digital folder, named clearly. "Dividend_Voucher_2025_06_30.pdf" is better than "scan0001.pdf". Your accountant will thank you.
How Do Quarterly Updates Work for Dividends?
Under MTD for ITSA, you submit quarterly updates to HMRC showing your income and expenses for that quarter. Dividends are part of your income. So each quarter, the dividends you received in that period must be included in the update.
This does not mean you pay tax quarterly. The quarterly updates are cumulative data submissions. Your final tax liability is calculated at year-end when you submit your end-of-period statement and final declaration. But HMRC gets to see your income (including dividends) every three months.
For agency founders who take irregular dividends, this means you need to be disciplined about recording each payment as it happens. If you take a large dividend in January and do not record it until April, your Q1 update will be wrong. HMRC may ask questions.
What Happens If You Do Not Keep Digital Records?
HMRC has not yet published the full penalty regime for MTD for ITSA record-keeping failures. But based on the VAT MTD regime, you can expect:
- Point-based penalties for late submissions
- Financial penalties for failure to keep adequate digital records
- Possible compliance checks if your records are consistently poor