Hi

With just two months to go before Making Tax Digital for Income Tax (MTD for ITSA) takes effect there is still a lot of confusion around who this applies to and when.

So, I thought I’d clarify who it applies to, how HMRC makes that decision and, if it applies to you, when you may be required to join.

Please note at the outset MTD for Income Tax applies only to self-employed individuals and landlords. It does not apply to limited companies. If all of your income is through a limited company, MTD for Income Tax does not apply to you and you can ignore the rest of this email.

Who MTD for Income Tax does apply to

MTD for Income Tax applies only if you are:

• a sole trader (self-employed), and/or
• a landlord with property income (UK and/or overseas),

and your income is above the relevant threshold. Companies, including owner-managed limited companies, are outside the scope of MTD for Income Tax.

The key rule HMRC uses to decide when you must join

HMRC uses one test only - they look at your most recently filed Self-Assessment tax return and check whether your qualifying income is above the MTD threshold for that year.

They do not look at:

• your current year income,
• estimates or projections,
• whether income later falls,
• whether income was one-off, or
• whether profits are low.

If the filed return is over the threshold, mandation is triggered.

What HMRC means by “qualifying income”

Qualifying income is the gross total of:

• self-employment income (turnover, before expenses), plus
• property income (gross rents, before expenses).

Important points:

• it is gross turnover, not profit,
• expenses are ignored,
• all trades and all property income are added together.

Qualifying income does not include:

• PAYE employment income,
• pensions,
• dividends,
• savings interest,
• capital gains.

Those income types are dealt with later (see Final Declaration below).

Which tax return HMRC will use

The return HMRC looks at depends on the start date.

Joining from 6 April 2026
HMRC looks at your 2024/25 tax return (filed by 31 January 2026)

• Over £50,000 qualifying income → you must join from April 2026
• £50,000 or less → you stay outside MTD for now

Joining from 6 April 2027
HMRC looks at your 2025/26 tax return

• Over £30,000 → you must join

Joining from 6 April 2028
HMRC looks at your 2026/27 tax return

• Over £20,000 → you must join

HMRC will usually write to confirm that you are mandated and invite you to sign up. However, legally your obligation comes from the figures on your tax return, not from receiving a letter. If the return meets the test, you are in scope whether or not HMRC has contacted you yet.

What happens once you are in MTD 

Under MTD for Income Tax, you must:

• keep digital records of your self-employment and/or property income, and
• submit quarterly updates to HMRC summarising that income and expenses.

These quarterly updates:

• are not tax returns,
• do not finalise your tax position,
• do not include PAYE income, dividends, pensions, or savings interest.

What the Final Declaration does

At the end of the tax year, you must submit a Final Declaration, which replaces the current Self Assessment return. The Final Declaration is where:

• the four quarterly updates are finalised,
• accounting and tax adjustments are made (e.g. capital allowances, private use),
• all other income is included, such as:
  • PAYE employment income,
  • dividends,
  • pensions,
  • savings interest,
  • any other taxable income,
• reliefs and allowances are claimed, and
• the final tax liability is confirmed.

The deadline remains 31 January following the end of the tax year, as it is now.

Situations that cause uncertainty

New businesses

If you start trading part-way through a tax year, HMRC may annualise your income when assessing whether you exceed the threshold. For example if you start trading in October and earn £30,000 by 5 April, HMRC may treat this as the equivalent of £60,000 for threshold purposes. Starting late in the year does not automatically keep you out of MTD.

Stopping trading (cessation)

If you stop trading before an MTD year starts:

• you are not required to keep MTD records for a business that no longer exists,
• but the mandation test still looks at the last filed tax return.

This can create awkward timing situations, and early discussion is sensible if this applies to you.

Basis period reform and overlap years

Overlap relief and transition profits do not by themselves bring you into MTD because the MTD test is based on gross income, not taxable profit and basis period reform affects profit timing, not turnover.

However, the transition year return is still the return HMRC uses. If qualifying income on that return is over the threshold, mandation applies, although higher taxable profit does not automatically mean higher qualifying income.

Multiple income sources

HMRC adds all your qualifying income sources together. So, for example:

• £28,000 from one trade,
• £24,000 from another trade.

Total qualifying income = £52,000 → MTD applies.

Jointly owned property

For jointly owned property:

• HMRC looks at your share only, not the total rent,
• each owner is assessed separately.

One owner may be mandated while the other is not.

What if income later falls?

Once you are in MTD, you normally stay in. You only leave MTD if:

• qualifying income falls below £20,000, and
• stays below that level for three consecutive tax years.

In summary

MTD for Income Tax:

• applies only to the self-employed and landlords,
• does not apply to limited companies,
• is triggered by one past tax return, not forecasts,
• includes PAYE, dividends and other income only at the Final Declaration stage.

If you are unsure whether you will be mandated, or if one of the situations that cause uncertainty above applies to you, please get in touch by replying to this email.

This email is for general guidance only and is not personalised advice. Before taking action, it’s usually best to get professional advice. If you’d like to talk things through, you can book a discovery call here: https://calendly.com/noelguilford/15min.

Noel Guilford

PS If you just have a quick question or are unsure whether Making Tax Digital for Income Tax applies to you, you can Ask Humphrey my custom GPT who knows all about it.