As a sole trader or landlord, your income rarely stays the same from one year to the next.
And if a slower year takes you below the MTD (Making Tax Digital) threshold, you might be wondering if you can stop using it.
Unfortunately, it’s rarely that simple, as the rules are designed to stop people moving in and out of the system every time their turnover changes.
In this article, we’ll walk through what happens if your income falls, how long you’ll need to stay in MTD, and what your options are moving forward.
What is MTD and how does it work?
MTD is an HMRC scheme to move income tax reporting online. For those affected, it means you must keep digital records throughout the year and send HMRC a quarterly update through compatible software. You must also still complete a year-end tax return.
Whether you have to use it depends on your qualifying income, which is your combined income from self-employment and property before expenses. So, it’s based on turnover rather than profit, and wages, pensions, dividends, and savings interest don’t count.
What are the MTD thresholds?
MTD for income tax is being phased in over three years, starting in 2026. The threshold falls each year, bringing more sole traders and landlords into the system.
Here are the thresholds:
- From 6 April 2026: qualifying income above £50,000 on your 2024/25 tax return
- From 6 April 2027: qualifying income above £30,000 on your 2025/26 tax return
- From 6 April 2028: qualifying income above £20,000 on your 2026/27 tax return.
When it comes to leaving, your income isn’t measured against the threshold that brought you in. If you joined in April 2026, your qualifying income needs to be £20,000 or less in each of 2026/27, 2027/28 and 2028/29 before you can leave in the 2029/30 tax year. If you do not meet that test, you may qualify after a later period of three consecutive tax years. So, dropping below £50,000 won’t change anything in terms of MTD.
Does falling below the income threshold take you out of MTD?
No, once HMRC brings you into MTD, one year at or below the threshold doesn’t release you. You’ll therefore still need to keep digital records and send quarterly updates, even if your turnover has dropped. And if you stop, you could face penalty points and fines. Penalty points for missed quarterly updates apply for tax years from 2027/28. The concession for 2026/27 only covers quarterly-update deadlines, so penalties for late tax returns and late tax payments still apply.
It’s also worth noting that HMRC decides whether you have to join MTD by looking at the tax return for the tax year two years before you start. For example, entry in April 2026 is based on your 2024/25 return, which was due by 31 January 2026. So, if your income was above £50,000 in 2024/25, you had to join in April 2026, even if your income was much lower the following year.
How long do you have to stay in MTD after your income drops?
Once you’ve been brought into MTD, your qualifying income has to be at or below the relevant threshold for three consecutive tax years before you become exempt. What’s more, those three years have to be ones in which you’re already using the system.
In other words, under the three-year income rule, if you joined in April 2026, the earliest you can leave is the 2029/30 tax year, no matter how much your income has fallen in the meantime. You may be able to leave earlier if another exemption applies to you, or if the tax return that brought you into MTD is corrected, reducing your qualifying income so that you no longer meet the entry requirement.
When the time comes, HMRC checks your figures using the final quarterly update of your third year, together with your tax returns for the two years before it. That last update is due by May 7th annually, so you can opt out before the first update of the new tax year is due.
What if your income stops altogether?
A total loss of earnings is treated differently from simply earning less under MTD rules. This means all of your self-employment and property businesses have ceased, for example, because you retire or sell your rental properties. In this scenario, you can leave MTD without waiting three years.
However, a temporary period with no income doesn’t count. If your business is continuing, even if it has no receipts for a while, you’ll still need to submit quarterly updates.
If your business (or businesses) has ceased, you’ll need to tell HMRC and give the date your income stopped by the deadline for the quarterly update covering that period. You’ll also need to send that final quarterly update and submit the tax return for the year your income stopped through your MTD software. After that, you can use a standard Self Assessment return for later years, if you still need to complete one.
If only one source of income stops, you’ll usually stay in. So, a landlord who sells their property but keeps a consultancy business stays within the rules for that business.
Can MTD help you manage a drop in income?
Staying in MTD while your income is lower can actually work in your favour. Each quarterly update shows how your turnover is building up across the year, and your software should give you an estimate of your tax bill after every submission. Bear in mind, however, that this estimate may be incomplete if it doesn’t include your other income or any adjustments. Even so, rather than waiting until January to find out where you stand, you’ll better understand your numbers and tax position sooner.
Another way MTD can help is if you pay your tax through payments on account, which are due on January 31st and July 31st. These are based on the previous year’s bill, so if your income has fallen, you could end up paying more than you owe and waiting for a refund. You can apply to HMRC to reduce your payments on account if you expect your bill to be lower.
Your quarterly figures can support your decision to reduce them. Just be careful not to reduce them too far, as you may be charged interest if the reduction leaves you underpaying.
What happens when you’re allowed to leave MTD?
Once you’ve met the three-year MTD rule, you can leave if you choose to do so. Leaving is not automatic, so your accountant will need to select the opt-out option through their agent services account or by you in your HMRC online account once you’re eligible. You can then go back to a standard Self Assessment return, or you can also carry on using MTD voluntarily.
For many individuals, staying in the MTD scheme makes more sense. This is mostly because the relevant software and quarterly routine will already be set up, and having a clearer view of your finances throughout the year is useful, no matter your turnover.
It’s also worth remembering that HMRC checks your income every year, so if it climbs back above the threshold, you can expect to be brought back in.
What are the most common questions about falling below the MTD threshold?
Am I exempt from MTD if my income falls below £50,000?
No, if you’ve already been brought into MTD for Income Tax, a drop below £50,000 doesn’t make you exempt. Under current rules, your qualifying income must be £20,000 or less for three consecutive tax years while you’re using the system before you can opt out. For someone who joined in April 2026, the earliest three years are 2026/27, 2027/28 and 2028/29. A later three-year period may qualify if the income condition is not met during those first three years.
Does jointly owned rental income count towards the MTD threshold?
Yes, but only your own share of the rental income counts. If you own a rental property with a spouse or partner, each owner’s share of the gross rent is tested against the threshold separately. For example, a property bringing in £40,000 a year and owned equally would give each owner £20,000 of qualifying income. Any self-employment income is then added on top of that amount.
Do I still need to send quarterly updates if my income drops?
Yes, once you’re using MTD for Income Tax, you must keep digital records and submit quarterly updates as normal until you have opted out, even if your income falls dramatically. For tax years from 2027/28, missed updates earn penalty points under HMRC’s points-based system, and reaching four points leads to a £200 fine. The exception is if all of your self-employment and property businesses have ceased.
Can I leave MTD if I stop being self-employed?
Yes, as long as all of your self-employment and property businesses have ceased. A temporary period with no income doesn’t count. You must tell HMRC by the deadline for the quarterly update covering the period your income stopped, and send that final quarterly update. The tax return for that year must still be submitted through MTD software. After that, you can use a standard Self Assessment return for later years, if one is required.
What should you do if your income has fallen?
In conclusion, if your income has fallen and you’re in MTD, it’s crucial to keep your quarterly updates going until you’re eligible to leave and have done so. You should also keep an eye on your qualifying income each year, remember that you’ll need to be at or below £20,000 to leave under current plans, and tell HMRC promptly if an income source ends.
The rules around leaving MTD are more complex than they first appear, and the right approach depends on your mix of income and your plans for the next few years. So, if you’re unsure where you stand, it’s worth speaking to an accountant sooner rather than later.