As the rollout of Making Tax Digital (MTD) for Income Tax gathers pace, HMRC has updated its guidance on how qualifying income is worked out. Some of the rules are straightforward, but a few could catch taxpayers by surprise.
1. Stopped Trading or Letting Property? You May Not Need MTD
If all of your self-employment and property income ceased before 6 April 2026, you will not need to join MTD for Income Tax.
For example, if you sold your rental property and stopped your sole trade before 6 April 2026, moving into employment instead, MTD would not apply because you no longer have any qualifying income sources.
However, HMRC stresses that you should make sure this cessation is reported. If HMRC’s records still show self-employment or property income, they may automatically sign you up for MTD.
Green Accountancy tip: If you’ve recently ceased trading or sold a rental property, let us know so we can ensure HMRC’s records are updated correctly.
2. Part-Year Income May Be Annualised
Started a business recently? Your income could be “annualised” when HMRC decides whether you need to join MTD.
For sole traders, HMRC may estimate what your income would have been over a full 12 months. So, if you generated £20,000 in six months, HMRC may treat that as £40,000 for MTD purposes.
Landlords must carry out this annualisation calculation themselves when working out qualifying income.
Why this matters: Even if your actual income for the year seems below the threshold, annualisation could bring you within MTD earlier than expected.
3. VAT Can Increase Your Qualifying Income
If you use the cash basis and are VAT registered, you can choose whether to include VAT within your declared business income.
If you choose to include VAT, that VAT-inclusive figure counts towards your qualifying income calculation.
For businesses close to the MTD thresholds, this could be enough to affect when MTD becomes mandatory.
4. Partnership Income Doesn’t Count
A common area of confusion is partnership income.
Your share of partnership profits does not count towards qualifying income for MTD purposes. Individual partners are not currently required to keep MTD records or send quarterly updates for partnership income.
The income still needs to be reported through compatible software when completing your tax return, but it does not currently bring you into MTD.
What Counts Towards the MTD Threshold?
Qualifying income generally includes:
- Gross self-employment income (before expenses)
- Gross property income (before expenses)
It does not include:
- Employment income (PAYE)
- Dividends
- Pension income
- Partnership profit shares as an individual partner
Need Help?
The MTD rules are becoming increasingly complex, particularly for clients with multiple income sources, changing circumstances or part-year trading periods. If you’re unsure whether MTD will apply to you, we’d be happy to help you work it out before HMRC comes calling.
At Green Accountancy, we’re helping clients navigate the move to MTD with practical advice, straightforward explanations and software solutions that fit the way they work.