Who Needs To Comply With MTD For Income Tax And Who Doesn’t

This is one of the first questions every accountant will face from clients – and the answer isn’t just about making tax digital; it’s about whether a client’s income profile, digital capability and reporting habits actually trigger the rules. MTD is part of a wider government initiative to modernise the tax system, making it more efficient, accurate, and easier for taxpayers to manage by shifting from traditional paper-based methods to digital processes. Making Tax Digital is now expanding to include Income Tax Self Assessment, moving the process from paper-based self assessment returns to quarterly, digital submissions via MTD for Income Tax compatible software. The official guidance from HMRC makes it clearer once you break it down, so here’s a practical, advisory explanation you can use with confidence, these changes are designed to streamline tax admin for both taxpayers and accountants.

What “qualifying income” means in practice

Making Tax Digital for income tax applies to individuals registered for Self Assessment who receive income from self-employment, property, or both, provided their total qualifying income exceeds a threshold in a tax year. Qualifying income is the combined gross income (before expenses) from self-employment and rental property. This includes the total gross income from all your sole trader and/or property business activities before deducting any expenses. Qualifying income includes all gross rental income and self-employment income before any deductions or expenses.

A few points that often catch clients out:

Employment income, bank interest and dividends don’t count towards qualifying income – even though they still form part of the overall tax calculation later.

Sole traders are included in the definition of individuals whose income is assessed for MTD qualifying income.

For jointly owned property, only your client’s share of the gross rental income (the total rental income before expenses) is included when assessing whether the threshold is met.

When clients become affected

MTD for income tax is phased in by tax year, based on qualifying income in the previous year:

From 6 April 2026, individuals with qualifying income over £50,000 must comply (this is the income threshold for that relevant tax year).

From 6 April 2027, the threshold reduces to £30,000.

From 6 April 2028, it drops again to £20,000.

This means clients won’t move to digital reporting mid-year. Instead, the income reported on their most recent Self Assessment tax return determines whether they must join MTD in the following tax year. The relevant tax year for assessing the income threshold is always the previous tax year.

Who does need to comply

Clients who will need to use MTD for income tax (once their threshold applies) include:

• Sole traders, self employed, self employed individuals, and self employed business owners with self-employment income above the relevant level, including those with UK property income, who must submit quarterly updates to HMRC
• Landlords with UK property or rental income that takes their total qualifying income over the threshold, who are also required to submit quarterly updates
• Individuals with multiple income sources from self-employment or property – each trade or property business must be reported separately under MTD, with quarterly updates for each

Self employed individuals manage their tax affairs by maintaining digital records of all business and property income, as well as allowable expenses, and submitting quarterly updates to HMRC using Making Tax Digital software for businesses, sole traders and landlords.

Once mandated, these clients must use a digital system or accounting software for digital record keeping, record transactions, and submit quarterly submissions (or quarterly updates) to HMRC for standard quarters, irrespective of the business’s accounting period, ideally via HMRC-recognised Making Tax Digital software. Taxpayers within scope will need to acquire a suitable commercial or compatible software product (MTD compatible software) or appoint an agent to submit information to HMRC on their behalf, for example by using Capium’s MTD-compatible accounting software. The software used must be compatible with HMRC’s systems to ensure compliance.

At the end of the year, a final declaration must be submitted to confirm the annual tax liability. Accounting adjustments may be required to finalise the tax position before submitting the final declaration. You will need to submit a tax return using your MTD compatible software, with payment of any balance due by the usual deadlines under payment on account.

HMRC uses a points based system for compliance. Each missed quarterly submission results in a penalty point, and accumulating enough penalty points can lead to a financial penalty, so accountants benefit from centralised MTD software to manage client obligations.

Who doesn’t need to comply (yet)

Not everyone within Self Assessment is affected immediately. Clients who generally do not need to comply include:

• Individuals whose total qualifying income from self-employment and property is £20,000 or less – they are exempt, unless the rules change. This is defined as Low Income status.
• Individuals whose total qualifying income is below the threshold of £50,000 as of April 2026. From April 6, 2028, the threshold will lower further to £20,000 or more.
• People who are digitally excluded under the ‘digital exclusion exemption’, where it is not reasonably practicable to use digital tools because of age, disability, religious beliefs, geographic location, or other genuine barriers. If you are digitally excluded, you must apply for this exemption by contacting HMRC, and someone else (such as an accountant or trusted family member) can apply on your behalf. If your application for exemption is rejected, you have 30 days to appeal the decision.
• Individuals who are automatically exempt, including trustees of deceased estates, qualifying foster carers, non-residents fulfilling specific tax criteria, individuals without a UK National Insurance number by January 31 before the relevant tax year, individuals aged 75 or over, and those subject to insolvency proceedings.
• Currently, general partnerships are not required to join MTD, but this will change in the future.
• Some small businesses below the VAT threshold may also be exempt from MTD for Income Tax, depending on their income and reporting requirements.
• Income from employment (PAYE), pensions, and dividends does not count toward the MTD income thresholds.

Individuals who do not meet the income threshold for MTD can volunteer to join to benefit from digital record-keeping. The requirement to keep digital records does not mean you have to scan and store invoices and receipts digitally; you can continue to keep documents in paper form if you prefer, but each individual transaction must be recorded and stored digitally.

In these cases, clients continue with the annual Self Assessment tax return (annual tax return) rather than quarterly digital reporting.

Non-residents with UK self employment may be exempt from MTD for Income Tax depending on their specific circumstances and access to digital tools.

Temporary exemptions and phased entry

Some clients may fall into temporary exemption categories during the early years of MTD for income tax. These are typically linked to the nature of their income in previous tax years and delay entry until a later phase, so staying informed via dedicated Making Tax Digital resources and guidance is essential. These exemptions are time-limited – not permanent – and HMRC will confirm eligibility in writing where applicable.

If a client’s income falls below the MTD threshold for three consecutive tax years, they may be eligible to exit the MTD system.

What this means for accountants

In practice, the test is simple but the conversations aren’t:

• Some clients clearly meet the criteria and need to prepare now
• Others will remain outside MTD for several years, even though they still file a Self Assessment return.

Clients close to the threshold need careful monitoring – especially where income fluctuates across tax years or includes both self-employment and property income. Accountants should pay particular attention to tax year quarters when tracking income and planning for MTD compliance, as reporting periods and deadlines are based on these quarters. Importantly, eligible clients must sign up individually. There’s no bulk enrolment, which makes early identification and planning essential.

Final thought on MTD for income tax rules

MTD for income tax isn’t just about who earns “enough” – it’s about when income qualifies, how it’s split across sources, and whether a client genuinely needs to comply or can claim an exemption.

Handled well, this becomes less of a compliance headache and more of a chance to guide clients through the changes with clarity and confidence, especially when extending the same digital approach to Making Tax Digital for VAT compliance.

To find out how Capium’s purpose-built MTD software can help you support clients through the transition and beyond, sign up for a free trial today and use it alongside compliance tools like AML software for accountants to strengthen your overall regulatory processes.