How to categorise bank transactions for Making Tax Digital
Making Tax Digital for Income Tax asks you to report your income and your expenses by category. Your bank statement does not do that for you, so each line needs a category before the totals mean anything. Here is a straightforward way to do it.
Step 1: separate business money from everything else
Only business transactions count. Transfers between your own accounts, personal spending, money you pay yourself (drawings), and loans or money you put in are not business income or expenses. In the calculator, mark these Not Applicable so they stay out of your figures. A separate business bank account makes this much easier.
Step 2: money in
Payments from customers go under Sales. Business income that is not sales, such as grants or other business receipts, goes under Other Business Income. Check whether a payment is really income before you include it: a refund or a loan is not.
Step 3: money out
Match each payment to the heading that best describes it. A few common examples:
| Payment | Usual category |
|---|---|
| Fuel, parking, train fares | Travel Costs |
| Mobile phone, broadband, software subscriptions, postage | Admin Costs |
| Rent and business rates | Premises Costs |
| Repairs to equipment or premises | Maintenance Costs |
| Adverts, marketing, website promotion | Advertising Costs |
| Accountant or solicitor | Professional Fees |
| Bank charges and card fees | Finance Charges |
| Stock and materials bought for resale | Cost of Goods |
| Anything allowable that fits none of the above | Other Expenses |
For a fuller list, see allowable expenses for sole traders.
Step 4: deal with costs that are not fully allowable
Some costs are only partly for the business, such as a phone used for both work and personal calls. Claim only the business share. Costs that are not allowable, such as client entertainment, are shown but ticked Disallowable, so they do not reduce your taxable profit.
Step 5: let the calculator do the repeat work
Most businesses pay the same suppliers every quarter. In MTD Software you list a word that appears in the bank description, such as “BT” or “Shell”, and the category you want. From then on, matching entries are categorised for you, and if you change a rule, entries that were categorised automatically update again. Entries you set by hand are left alone.
Step 6: check your totals
Make sure money in and money out add up to your bank statement, and that no entries are left uncategorised. The calculator shows a warning while any are outstanding. Keep your bank statements, because HMRC can ask to see the records behind your figures.
Frequently asked questions
Do I have to categorise every bank transaction for MTD?
You need to report income and expenses by category, so every business transaction needs a category. Personal items and transfers are not business transactions and stay out.
What do I do with personal spending in my business account?
Leave it out of your figures. In MTD Software, mark it Not Applicable. A separate business bank account avoids the problem.
Can the calculator categorise automatically?
Yes. You add keyword rules, and matching bank entries are categorised for you. You can still change any entry by hand.
Related guides
- MTD calculator for the self-employed
- Can I use a spreadsheet for MTD?
- Who needs MTD for Income Tax?
- Quarterly update deadlines
- Allowable expenses and categories
- Cumulative figures explained
This guide is general information, not tax advice. Always check GOV.UK or ask an accountant about your own position. Last updated 2 November 2026.