Making Tax Digital for Income Tax is now live for sole traders and landlords whose qualifying income was over £50,000 in the 2024 to 2025 tax year.
That has created a new question for many business owners: what happens if you were brought into MTD based on an earlier return, but your income has since fallen?
Many people have had one strong year, crossed the threshold, and then seen income soften afterwards. Others have stopped a rental stream, reduced their self-employed work, or simply had a quieter year than expected.
The short answer is that a drop in income does not usually take you straight back out of MTD.
In most cases, once you are required to join Making Tax Digital for Income Tax, you must continue using the system until HMRC confirms you can opt out or until your qualifying income sources have genuinely ceased.
Key Takeaway
A lower income year does not usually remove you from MTD immediately.
In most cases, you must remain inside the system until HMRC confirms you can opt out or your qualifying self-employment or property income sources have ended.
Why This Matters Now
MTD for Income Tax started on 6 April 2026 for people with qualifying income over £50,000.
HMRC looks at your earlier Self Assessment return to decide whether you had to join.
That means someone who had a strong 2024 to 2025 year may now be inside MTD even if their income in 2025 to 2026 or 2026 to 2027 turns out to be much lower.
This catches many business owners out because they assume the rules work like an instant rolling test.
They do not.
There is a joining test, and then there is a separate process for leaving.
Do You Leave MTD Automatically If Your Income Falls?
No. If your income falls after you join Making Tax Digital for Income Tax, you will usually need to stay in the system for a while longer.
HMRC says you can choose to opt out only after your qualifying income has been below the relevant threshold for three consecutive years.
HMRC uses the information from your fourth quarterly update for the third year to confirm whether you are eligible.
Until then, you will normally still need to:
- Keep digital records
- Use compatible software
- Send quarterly updates
- Complete your year-end tax return through MTD software
So if you are hoping that one lower year will remove the obligation immediately, that is not how HMRC currently operates the system.
How HMRC Decides You Had To Join MTD
For the first wave of mandatory MTD, HMRC checks your 2024 to 2025 Self Assessment return.
If your total qualifying income from self-employment and UK or foreign property was over £50,000 for that tax year, you are required to use MTD for Income Tax from 6 April 2026.
Qualifying income is based on gross income, not profit.
In other words, HMRC looks at income before expenses are deducted.
This remains one of the biggest areas of confusion.
A business owner may say:
“My profit is nowhere near £50,000.”
However, if gross self-employment income plus property income exceeds the threshold, MTD may still apply.
Does Lower Income Automatically Remove You From MTD?
Not usually.
When people talk about income dropping, they often mean one of several different things:
- Their turnover has reduced but they still have self-employment or property income
- One income source has become much smaller
- They have stopped one income source but still have another
- They have stopped their only qualifying income source altogether
These situations are not treated in exactly the same way.
A lower level of continuing income does not normally allow you to leave MTD immediately.
A fully ceased income source is different, especially if it was your only qualifying source.
If Your Income Has Fallen But You Are Still Trading Or Receiving Rent
This is the situation most people mean.
You are still self-employed, still receiving rental income, or both, but your income is now below the threshold that originally brought you into MTD.
In this situation, HMRC says you can opt out only if your qualifying income has remained below the relevant threshold for three consecutive years.
HMRC also says it will use the income shown in your fourth quarterly update for the third year to confirm your eligibility.
If you qualify, the opt-out option should appear in your HMRC online services account or your agent services account.
In practice, this means a drop in income usually leads to continued compliance first and possible opt-out later.
HMRC’s Example: Why The Timing Can Feel Harsh
HMRC provides an example for taxpayers who entered MTD in April 2026.
Under current guidance, someone could remain inside the MTD system for several years after their income drops below the threshold.
This is one reason many sole traders and landlords are surprised by the rules.
People often expect MTD to react immediately to a lower income year, but the opt-out process can take much longer in practice.
If You Stop One Income Source But Another Continues
If one source of income stops but another qualifying self-employment or property income source continues, you do not automatically leave MTD.
For example, you may stop one sole trade while continuing as a landlord, or one rental stream may end while another continues.
In that situation, you must still:
- Tell HMRC the ceased source has ended
- Complete any outstanding quarterly updates for that source
- Continue using MTD for the income sources that remain active
The key issue is not only whether income has fallen.
It is whether you still have qualifying income sources that keep you inside the system.
If You Stop Your Only Qualifying Income Source
This is the main exception business owners should understand.
If you cease your only self-employment or property income source, HMRC says you must:
- Tell HMRC the date the income source ceased
- Send the final quarterly update for the period covering that date
- Include the ceased income in your tax return for that tax year using MTD software
After that tax year, you would not normally need to continue using MTD for Income Tax unless you later start a new qualifying self-employment or property income source.
So if your only qualifying business or property income has genuinely ended, the position is different from simply having a weaker year.
Are There Any Exceptions Or Early Opt-Out Rules?
Possibly, but only in limited situations.
If your circumstances change and you become exempt, HMRC says you should opt out using your online account.
One example is digital exclusion, where it is no longer reasonable for you to use compatible software to keep digital records and make submissions.
That is very different from saying MTD feels inconvenient or that income has fallen.
A lower income level alone does not normally create an immediate exemption.
Common Mistakes To Avoid
When income drops, the most common mistakes are:
- Assuming MTD stops automatically
- Confusing profit with qualifying income
- Forgetting to tell HMRC when an income source has genuinely ceased
- Stopping digital record-keeping too early
- Choosing software in a panic and changing systems without a proper handover plan
If you are still inside MTD, even temporarily, your records and reporting process still need to work properly.
What You Should Do If Your Income Has Fallen
If this situation applies to you, the safest approach is to:
- Check whether your income has genuinely fallen below the relevant qualifying threshold
- Confirm whether you still have one or more continuing qualifying income sources
- Keep meeting your MTD obligations until HMRC confirms you can opt out or your final qualifying source has ceased
- Get advice before you stop filing returns or change your setup
This is especially important if you have a mix of self-employment and rental income, or if one income source has ended while another continues.
How AA&R Certified Accountants Can Help
At AA&R Certified Accountants, we help sole traders, landlords, and small business owners understand whether MTD still applies, what counts as qualifying income, and what to do when circumstances change.
We can help you review your threshold position, deal with ceased income sources correctly, keep your digital records compliant, and avoid the risk of leaving the system too early.
A fall in income does not always mean you can leave MTD immediately, and getting the timing wrong can create reporting problems later.
If your income has dropped and you are unsure whether you still need to remain in MTD, speak to AA&R Certified Accountants for clear, practical guidance based on your current position.
Contact Us Today
Disclaimer
This article is for general information only and should not be treated as personal tax advice. Making Tax Digital rules can change, and the right approach depends on your circumstances.
