Making Tax Digital Income Thresholds: What You Need to Know About Income Drop Relief

Thresholds move down: a phased mandate

The UK government’s Making Tax Digital Income Thresholds for Income Tax Self‑Assessment (MTD ITSA) reforms bring the UK’s largest shift in personal tax compliance for decades. From April 2026, sole traders and landlords with total self‑employment and property income above £50,000 must keep digital records and file quarterly updates using MTD‑compatible software. The threshold falls to £30,000 for the 2025/26 tax year, meaning those earning more than that will be mandated from April 2027. The Spring Statement 2025 announced a further reduction to £20,000 from April 2028, which will bring almost a million more taxpayers into scope.

These thresholds apply to qualifying income – a concept that excludes wages, dividends or pension income. HMRC defines qualifying income as the total gross income from self‑employment and property letting. In other words, digital reporting is triggered by turnover, not profits, so high expenses do not keep you out. HMRC assesses this on the tax return filed the year before mandation. Even income from a ceased business counts if there is at least one continuing source.

Making Tax Digital Income Thresholds: Understanding the Income Drop Relief

The UK government’s Making Tax Digital (MTD) initiative, set to be fully implemented by April 2026, will require businesses with qualifying income above certain thresholds to report taxes digitally. However, the system has built-in flexibility for businesses whose income fluctuates.

Under the current rules, once a business meets the qualifying income threshold—£50,000 starting in 2026, falling to £30,000 in 2027 and £20,000 in 2028—it must transition to MTD. However, if a business’s income dips below the threshold for three consecutive tax years, it can eventually opt out of MTD.

This rule helps businesses that may experience occasional income drops but prevents constant switching between the MTD system. For instance, a sole trader earning £52,000 in 2024/25 would be required to comply with MTD by April 2026. If their earnings later drop to £28,000, they must remain within MTD until their income stays below the threshold for three full tax years. Only then can they revert to traditional self-assessment.

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Income Drop Relief for MTD: Why the Three-Year Rule Affects Your Costs

Digital reporting promises long‑term accuracy and productivity benefits, but the transition comes with costs. HMRC estimates that those mandated between £30,000 and £50,000 will face average one‑off costs of around £350 and annual ongoing costs of about £110 for software and additional record‑keeping. Businesses already using accounting software may face minimal additional cost, but less digitally capable businesses will need to invest in hardware, software and training. HMRC has committed to ensuring free software for the smallest, simplest businesses, but the availability and suitability of these products remain a concern.

The requirement to stay in Income Drop Relief for MTD for three years after income falls below the threshold prolongs these costs. A landlord whose rental income dips under £30,000 in 2027 may still be paying software subscriptions until 2030. This income drop relief is therefore a misnomer: relief is only available after a prolonged period of lower income. Failing to comply risks penalties and late‑filing sanctions.

MTD for Sole Traders and Landlords: How the New Rules Impact You

The phased thresholds will pull different groups into digital reporting:

• MTD for Sole Traders and Landlords: High‑turnover sole traders and landlords, those earning above £50,000 in 2024/25, will lead the transition from April 2026. Many professional contractors, doctors, artists and landlords with multiple properties fall in this bracket.
• Medium‑income businesses: those earning £30,000–£50,000 in 2025/26 will join from April 2027. This includes part-time landlords, tradespeople and small retailers.
• Lower-income self-employed and landlords: from 2028, the threshold is expected to fall to £20,000. Many side hustles and microbusinesses will then be mandated.

The three‑year exit rule particularly affects those with seasonal or volatile income. Farmers, creatives and hospitality businesses often see turnover fluctuate; once mandated, they could remain locked in even after downsizing. The rule may also delay retirement: an individual hoping to wind down their business may need to maintain digital records for three extra years.

Planning for MTD: thresholds and income drop relief

Businesses should proactively monitor their qualifying income and plan for the implications:

1. Forecast your turnover. Identify when your income is likely to exceed £50k, £30k or £20k and prepare accordingly. Early voluntary adoption may smooth the transition and help you familiarise yourself with the software.
2. Understand the 3‑year lock‑in. If you expect income to fall below the threshold, budget for at least three more years of digital compliance. Consider the timing of asset sales or business changes to minimise these years.
3. Choose appropriate software. Evaluate MTD‑compatible software based on your business complexity and budget. Some free options exist for straightforward businesses, but paid software may offer better functionality. Ensure the software can produce quarterly updates, maintain digital records, and connect directly to HMRC.
4. Keep digital links. HMRC requires digital links between records and submissions. Manual copy‑and‑paste or spreadsheet bridging may not be enough. Plan for training or external support to comply with digital linking rules.
5. Apply for exemptions if eligible. HMRC offers exemptions where it is not reasonably practicable to use digital tools, for example due to disability, age, location or religious beliefs. If your income falls very low, you may request an exemption before the three‑year period ends.

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Apex Accountants: navigating digital reporting transitions

As the digital tax landscape evolves, specialist advice becomes essential. Apex Accountants & Tax Advisors has been following MTD ITSA developments since the first consultations. Our team can:

• Assess qualifying income and determine when you must join MTD.
• Develop digital record‑keeping systems, from selecting software to implementing compliant processes.
• Advise on structuring business activities to manage threshold exposure and plan for the three‑year lock‑in.
• Support exemption applications where digital compliance is not practicable.

Whether you’re a landlord, a sole trader or a mixed-income professional, expert guidance can reduce risk and allow you to focus on your business. Contact Apex Accountants today to discuss your position and build a bespoke MTD strategy.

Frequently asked questions

What counts as qualifying income for MTD?

HMRC counts your gross self‑employment and property income. Employment earnings, partnership profits, shares, dividends, and pensions are ignored.

When do I need to join MTD ITSA?

If your qualifying income exceeds £50,000 in 2024/25, you will join from April 2026; if it exceeds £30,000 in 2025/26, you will join from April 2027; if it exceeds £20,000 in 2026/27, you will join from April 2028.

Can I leave MTD as soon as my income drops below the threshold?

No. You must continue using MTD until your qualifying income remains below the threshold for three consecutive tax years. Only then can you opt out.

What if one of my income sources ceases? 

If you stop trading or letting property entirely, you can exit MTD after filing your final quarterly update and annual return. But if you have another source of qualifying income, you must stay in MTD until that source has remained below the threshold for three years.

Is the threshold based on profit or turnover?

 It is based on gross turnover (income before expenses). Even if your profits are low or you make a loss, a high turnover can still bring you into MTD.

Are there any exemptions? 

Yes. You may be exempted if it is not reasonably practicable to keep digital records due to age, disability, location, or religious beliefs. You can also apply for exemption if your income becomes very low and the cost of digital compliance outweighs the benefits.

As the government phases in MTD ITSA, understanding the thresholds and the delayed income drop relief is vital. Planning ahead and seeking professional advice will help mitigate risks and ensure compliance while the digital tax regime evolves.