A sole trader who invoiced £55,000 last year but spent £20,000 on costs has qualifying income of £55,000, not £35,000. HMRC looks at gross receipts from self-employment and property before any deductions. Many people get this wrong, checking their profit figure, seeing it below the threshold, and assuming Making Tax Digital for Income Tax doesn’t apply. That mistake can lead to penalties now that the first mandatory phase has begun, as set out in HMRC’s MTD for Income Tax guidance.
The confusion sits in one place: the difference between gross income and net profit. HMRC’s qualifying income definition, as outlined in the Income Tax (Digital Requirements) Regulations, is based on gross receipts, not what you cleared after expenses.
Last updated: May 2026. Thresholds and dates reflect HMRC guidance current at this date. Check HMRC’s MTD for Income Tax page for the latest position.
Qualifying Income for MTD: The Core Definition
Qualifying income for Making Tax Digital for Income Tax means your total gross receipts from self-employment and property rental, not your net profit, not your take-home pay, and not any other income type.
HMRC defines qualifying income under the Income Tax (Digital Requirements) Regulations. Only income from self-employment (sole trader business) and property rental is included. Salaries, pensions, dividends, and savings interest don’t feed into the calculation.
If you’re both a sole trader and a landlord, you add the gross figures from each source together. That combined total is your qualifying income.
HMRC draws the figure from specific boxes on your Self Assessment tax return: the turnover box on SA103 (box 10) for self-employment and the total rents box on SA105 (box 20) for property income. It’s not your bank balance, and it’s not the profit figure on your tax bill. It’s the raw turnover or rental receipts number.
When you have more than one qualifying income stream, say, a freelance business and a buy-to-let property, HMRC adds both gross figures together before comparing the total against the relevant threshold.
Is Qualifying Income Turnover or Profit?
Qualifying income is turnover, not profit. For sole traders, it’s your total sales receipts before subtracting any business costs, matching the turnover box (SA103, box 10) on your Self Assessment return.
For landlords, the same logic applies. Qualifying income is your gross rental receipts before you deduct mortgage interest, letting agent fees, repairs, insurance or any other expense. If your tenants paid you £52,000, your qualifying income is £52,000, even if costs ate up £30,000 of that.
No expenses reduce qualifying income for the threshold test. HMRC’s MTD guidance confirms the test is purely about what came in.
A practical example: a sole trader invoices £55,000 and has £20,000 in costs, leaving taxable profit of £35,000. You might think £35,000 sits below the £50,000 threshold, but qualifying income is £55,000. That trader is in scope for the phase that began in April 2026.
What Counts as Qualifying Income?
For MTD purposes, only two income types count: gross self-employment turnover and gross property rental receipts. Everything else, salaries, pensions, dividends, savings interest, is excluded from the threshold test entirely.
Sources that count:
- Sole trader business turnover, all sales receipts from any self-employment, including freelance fees, trade income, cash sales and online sales, before deducting any costs.
- UK property rental income, gross rental receipts from residential lettings, before expenses.
- Commercial property rental income, treated on the same basis as residential rental income.
- Furnished holiday lettings income, gross receipts from qualifying holiday let properties. Note: the separate FHL tax regime is being abolished from April 2025. From that date, this income falls under standard property income rules. For MTD purposes, it still counts as qualifying property income.
- Your share of jointly owned property, only your proportional share of the gross rent counts towards your personal qualifying income total.
- Partnership trading income, a partner’s individual share of the partnership’s gross trading receipts may count towards their personal qualifying income for threshold purposes.
Sources that don’t count:
- Wages and salaries
- State pension, excluded regardless of amount.
- Workplace and personal pensions, also excluded.
- Dividend income, particularly relevant for directors of owner-managed limited companies. Dividends from your own company don’t count, but gross income from any sole trader business or rental property does.
- Interest income from savings or investments.
- Capital gains from selling assets.
Someone on a £90,000 salary with a rental property generating £8,000 in gross rent has qualifying income of just £8,000.
Are Pensions Included in Qualifying Income for MTD?
No. All pension types are excluded: state, workplace, and personal.
Pension income appears on your Self Assessment return and is taxable, but it sits in different boxes from self-employment and property income. Those pension boxes play no part in the MTD qualifying income calculation.
Example: a retired person receives £12,000 in state pension and £15,000 from a private pension, plus £52,000 gross from a rental property. Total personal income is £79,000, but qualifying income for MTD is just £52,000. Because that exceeds £50,000, they’re in scope for the phase that began in April 2026.
Is Rental Income Included in Qualifying Income for MTD?
Yes. Rental income is one of the two main qualifying income sources for MTD. It counts in full, at the gross level, before any expense deductions.
A buy-to-let property generating £30,000 in annual rent adds £30,000 to your qualifying income, even if mortgage payments leave you with only £12,000.
What types of rental income qualify?
- Residential property lettings
- Commercial property lettings
- Furnished holiday lettings (treated under standard property income rules from April 2025)
Joint ownership
If you jointly own a rental property, only your share of the gross receipts counts. Two people splitting a property 50/50 generating £40,000 in gross rent each have £20,000 of qualifying income from that source.
Combining with self-employment
If you’re a sole trader who also lets property, both gross figures are added together. A freelancer with £25,000 in business turnover and £28,000 in gross rental income has £53,000 of qualifying income, above the £50,000 threshold that applied from April 2026.
How Much Do You Have to Earn to Be Subject to Making Tax Digital?
You must comply with MTD for Income Tax once your qualifying income exceeds the threshold for the relevant phase, currently set at three levels across 2026 to 2028.
- April 2026: qualifying income over £50,000
- April 2027: qualifying income over £30,000
- April 2028: qualifying income over £20,000
The £50,000 and £30,000 thresholds were confirmed in the Autumn Budget 2024. The £20,000 threshold was confirmed in the Spring Statement 2025. If you’ve seen older guidance mentioning a £10,000 threshold, that was the original statutory default. No date has been set for any threshold below £20,000.
How HMRC decides which phase applies to you
HMRC uses the “current year minus two” (CY-2) method. It checks your qualifying income from the Self Assessment return filed two tax years before the MTD start date.
| MTD start date | Qualifying income threshold | Assessment year (CY-2) | Self Assessment return used |
| April 2026 | Over £50,000 | 2024/25 | Filed by January 2026 |
| April 2027 | Over £30,000 | 2025/26 | Filed by January 2027 |
| April 2028 | Over £20,000 | 2026/27 | Filed by January 2028 |
For the April 2026 phase, HMRC checked your 2024/25 return. If qualifying income exceeded £50,000, you’re in scope. If not, HMRC assesses you for April 2027 using your 2025/26 return.
If you haven’t filed the relevant return yet, the obligation still applies if your qualifying income exceeded the threshold. If your income has since dropped, you don’t automatically exit, HMRC requires the lower income to be sustained, and there’s a process to follow.
Do I Need to Do Anything for Making Tax Digital?
Whether a sole trader or landlord needs to act for Making Tax Digital depends on qualifying income and which phase applies. The following summarises the key obligations; for full details see HMRC’s MTD for Income Tax guidance.
If you’re in scope
1. Keep digital records
All income and expenses must be recorded digitally throughout the tax year using MTD-compatible software. Paper records and standalone spreadsheets aren’t sufficient unless linked to compliant software via a digital bridge.
2. Submit quarterly updates
You’ll send four updates to HMRC per tax year, covering each quarter: 6 April to 5 July, 6 July to 5 October, 6 October to 5 January, and 6 January to 5 April.
3. Submit a final declaration
After the tax year ends, you submit a final declaration confirming total income and claims. This replaces the traditional annual Self Assessment return for qualifying income sources. You may still have Self Assessment obligations for other income types such as dividends or capital gains.
Software
HMRC requires MTD-compatible software or bridging software connecting your spreadsheet to HMRC’s systems. HMRC publishes a list of recognised MTD-compatible software.
If you’re below the threshold
No mandatory action is required. Voluntary sign-up is available for those who want to adopt quarterly reporting early.
Penalties
Once your mandatory phase begins, HMRC’s points-based late submission penalty regime applies. Each missed quarterly update or late filing adds a penalty point; once you reach the threshold, a financial penalty is triggered. Late payment penalties apply separately. A soft landing applies for the 2026/27 tax year: no penalty points are issued for late quarterly updates during that year, though all four updates must still be submitted before you can make your final declaration.
Making Tax Digital for the Self-Employed: What You Need to Know
If you’re self-employed as a sole trader, all your gross business receipts count towards qualifying income, including cash sales, online sales, freelance fees, consulting income, and trade receipts of any kind, before deducting any costs.
Multiple businesses
HMRC combines the gross income from all your self-employment businesses. A sole trader with £28,000 turnover from one business and £25,000 from another has £53,000 of qualifying income, above the £50,000 threshold from April 2026.
Partnerships
If you’re a partner in a trading partnership, your individual share of the partnership’s gross trading receipts may count towards your personal qualifying income. Your share is generally calculated by applying your profit-sharing ratio to the partnership’s gross turnover.
Employment alongside self-employment
Only sole trader turnover counts, not your salary. A person earning £40,000 in salary and £35,000 in sole trader turnover has qualifying income of £35,000. They are not caught by the April 2026 phase but are in scope from April 2027.
The Trading Allowance and Qualifying Income for MTD
The £1,000 trading allowance reduces your taxable income but does not reduce your qualifying income for the MTD threshold test. The same applies to the £1,000 property allowance.
If your gross self-employment receipts are £52,000, you can’t subtract the £1,000 trading allowance to bring yourself to £51,000 for the threshold check. Your qualifying income is still £52,000.
No deductions, allowances or reliefs of any kind reduce qualifying income for the MTD threshold test, not capital allowances, not loss relief, not finance cost restrictions. The number HMRC uses is always the gross receipts figure, untouched by any adjustment.
Exemptions from Making Tax Digital: Who Is Excluded?
HMRC recognises a limited number of grounds on which individuals above the qualifying income threshold may be exempt from MTD: religious beliefs that are incompatible with electronic communications, digital exclusion due to age, disability or remote location, third-party management of a taxpayer’s affairs by an HMRC-appointed deputy, and operation through a limited company rather than as an individual.
These exemptions are narrow and, in most cases, require an application to HMRC.
Religious beliefs
Practising members of a religious society whose beliefs are incompatible with using electronic communications can apply for exemption.
Digital exclusion
Individuals who genuinely cannot engage with digital tools may qualify. This covers people unable to use computers or software due to age, disability, or lack of reliable internet access in a remote location. Exemptions are not automatic; HMRC assesses each case individually.
Third-party management
Where a taxpayer’s affairs are managed entirely by a third party appointed by HMRC, such as under a deputyship arrangement, deferral from MTD obligations may be possible.
Limited companies
MTD for Income Tax applies only to individuals. Limited companies are entirely outside its scope. MTD for VAT is a separate regime with its own rules.
Below the threshold
Taxpayers whose qualifying income falls below the current mandatory threshold don’t have a mandatory obligation yet. If income rises above a threshold in a future assessment year, they’ll be brought in.
How HMRC Calculates Your Qualifying Income: The CY-2 Method
HMRC uses the “current year minus two” (CY-2) method. It looks back two years, not the tax year you’re currently in, to decide whether MTD applies.
| MTD start date | Qualifying income threshold | Assessment year | Self Assessment return used |
| April 2026 | Over £50,000 | 2024/25 | Filed by January 2026 |
| April 2027 | Over £30,000 | 2025/26 | Filed by January 2027 |
| April 2028 | Over £20,000 | 2026/27 | Filed by January 2028 |
HMRC pulls data from SA103 box 10 (self-employment turnover) and SA105 box 20 (property income). Other income reported elsewhere on the return is ignored for this purpose.
If qualifying income falls below the threshold after enrolment, you don’t automatically exit. HMRC requires the lower income to be sustained, and there’s a process to follow. If you didn’t file a return for the relevant year, make your own assessment based on gross receipts, the obligation applies regardless.
Frequently Asked Questions
Does dividend income count towards qualifying income for MTD?
No. Only gross self-employment turnover and gross property rental receipts count. Dividends from your own company are invisible to the MTD threshold test. If you also have sole trader income or rental income, those sources do count.
Does employment income count towards qualifying income for MTD?
No. Salary, wages and other employment income reported through PAYE are excluded. Only gross self-employment receipts and any rental income count towards the threshold.
What happens if my qualifying income falls below the MTD threshold after I’ve signed up?
You don’t automatically leave MTD. HMRC applies specific rules and requires the lower income to be sustained before removing the obligation.
Can I opt into Making Tax Digital voluntarily if I’m below the threshold?
Yes. Voluntary sign-up is available for those who want to get comfortable with the software and quarterly reporting ahead of a mandatory phase.
Does commercial property income count as qualifying income for MTD?
Yes. Gross rental income from commercial property qualifies in the same way as residential rental income, before any expense deductions.
Not Sure Where You Stand?
Still unsure whether Making Tax Digital applies to you? The gap between profit and qualifying income catches a lot of people out, and getting it wrong can mean penalties. Contact Reed & Co today and we’ll confirm exactly where you stand and what you need to do to stay compliant.
