Many sole traders and landlords are unsure whether Making Tax Digital (MTD) for Income Tax will apply to them. One of the biggest areas of confusion is HMRC’s use of qualifying income when deciding who must comply.
Understanding what qualifies as income, how HMRC calculates it, and when the rules apply can help you prepare well before the new reporting requirements take effect.
What Is Qualifying Income for Making Tax Digital?
Qualifying income is generally the total gross income you receive from self-employment and property before expenses are deducted.
HMRC uses this figure to determine whether you fall within the Making Tax Digital for Income Tax rules.
This means that even if your taxable profit is relatively low after expenses, you may still be required to comply with MTD if your qualifying income exceeds the relevant threshold.
When Will Small Businesses Need to Use Making Tax Digital?
Making Tax Digital for Income Tax is being introduced in stages.
Sole traders and landlords may need to use it from:
- 6 April 2026 if qualifying income is over £50,000, based on the 2024–2025 tax year
- 6 April 2027 if qualifying income is over £30,000, based on the 2025–2026 tax year
- 6 April 2028 if qualifying income is over £20,000, based on the 2026–2027 tax year
The rules apply to individuals who are registered for Self Assessment and receive self-employment income, property income, or both.
Is the Threshold Based on Turnover or Profit?
The threshold is based on qualifying income, not profit.
For most sole traders, qualifying income is broadly equivalent to business turnover before expenses are deducted.
For example:
| Item | Amount |
|---|---|
| Business turnover | £55,000 |
| Business expenses | £30,000 |
| Taxable profit | £25,000 |
Although the taxable profit is only £25,000, the qualifying income is £55,000. In this situation, the business owner may still be required to comply with MTD from April 2026.
This distinction between turnover and profit is one of the most common misunderstandings surrounding Making Tax Digital.
What If You Have More Than One Income Source?
If you have more than one source of self-employment income, HMRC looks at the combined qualifying income. Property income may also be included.
For example:
- Sole trader business income: £29,000
- Second self-employed income source: £24,000
- Total qualifying income: £53,000
In this example, the combined income exceeds £50,000. This could bring the individual into Making Tax Digital from April 2026, even though neither business generates more than £50,000 on its own.
If you have multiple income streams, it is important to review the combined figure carefully.
How Does Qualifying Income Work for Landlords?
Landlords should also pay close attention to the qualifying income rules.
For property owners, qualifying income is generally based on gross rental income before allowable expenses are deducted.
This means costs such as:
- Mortgage interest relief restrictions
- Letting agent fees
- Repairs and maintenance
- Insurance
- Service charges
do not reduce the qualifying income figure used to determine whether MTD applies.
If you own multiple rental properties, HMRC generally considers the combined rental income across your property business.
Because of this, some landlords may find they fall within MTD sooner than expected.
What About Limited Companies?
Making Tax Digital for Income Tax applies primarily to individuals who complete Self Assessment tax returns, including sole traders and landlords.
It does not currently apply to Corporation Tax reporting for limited companies.
However, many limited companies are already affected by Making Tax Digital for VAT, which requires VAT-registered businesses to maintain digital records and submit VAT Returns using compatible software unless exempt.
What Will Small Businesses Need to Do Under MTD?
Individuals within Making Tax Digital for Income Tax will generally need to:
- Keep digital records of income and expenses
- Use compatible software
- Send quarterly updates to HMRC
- Review and finalise information at the end of the tax year
- Submit their annual tax return through compatible software
- Pay tax by the usual 31 January deadline
The quarterly updates are not full tax returns. They provide HMRC with summary information about income and expenses throughout the year.
What Business Records Should You Keep?
Good record keeping is essential for MTD compliance.
Small businesses should maintain digital records of:
- Sales income
- Invoices issued
- Bank payments received
- Materials and stock purchases
- Travel expenses
- Insurance premiums
- Subscriptions
- Professional fees
- Other business costs
Each record should include:
- Date
- Amount
- Category
- Relevant supporting information
Maintaining accurate records throughout the year can significantly reduce administrative pressure when reporting deadlines arrive.
Why Small Businesses Should Prepare Early
Many business owners currently organise records once a year when preparing their Self Assessment return.
Making Tax Digital makes this approach more challenging because information must be available for quarterly reporting.
Preparing early allows you to:
- Separate business and personal finances
- Choose suitable accounting software
- Improve bookkeeping processes
- Correct record-keeping issues before deadlines
- Avoid a rushed implementation
Better financial records can also provide valuable insight into business performance throughout the year.
Frequently Asked Questions
Is qualifying income the same as profit?
No. Qualifying income is generally measured before business expenses are deducted, whereas profit is calculated after allowable expenses.
Do I need MTD if I have two small businesses?
Possibly. HMRC may combine qualifying income from multiple self-employment sources when determining whether you meet the threshold.
Does rental income count towards MTD thresholds?
Yes. Property income is included when calculating qualifying income for Making Tax Digital purposes.
Will limited companies be affected by MTD for Income Tax?
No. MTD for Income Tax currently applies to individuals such as sole traders and landlords rather than limited companies.
Can I still use spreadsheets for MTD?
Potentially yes. HMRC allows spreadsheet-based record keeping if it forms part of a compatible MTD-compliant system and is connected through suitable bridging software where required.
How AA&R Certified Accountants Can Help
At AA&R Certified Accountants, we help sole traders, landlords and small businesses prepare for Making Tax Digital with confidence.
Our team can help you:
- Determine whether MTD applies to you
- Calculate your qualifying income
- Review your current bookkeeping systems
- Implement suitable accounting software
- Maintain compliant digital records
- Meet quarterly reporting requirements
If you are unsure whether your income brings you within the scope of Making Tax Digital, seeking advice early can save time, stress and potential compliance issues later.