I speak to sole traders every week who believe they are safe from Making Tax Digital (MTD) because their profit is under £50,000. They are wrong.
Get this calculation wrong and you could face penalties for failing to comply with a system you did not know applied to you. MTD thresholds are based on qualifying income, not profit.
This guide explains exactly what counts as qualifying income, what does not count, and how to calculate yours so you know precisely where you stand.
What is Qualifying Income?
Qualifying income is your gross turnover from self-employment and property income before any expenses are deducted.
This is the critical point that trips people up. It is not your profit. It is not your taxable income. It is your total sales and rent received before you subtract any costs.
For example, if you sell £80,000 worth of products through your ecommerce business but your costs leave you with £25,000 profit, your qualifying income is £80,000. You are over the threshold even though your profit is relatively modest.
The Combined Income Trap
If you have multiple sources of income, HMRC adds them all together. This catches a lot of people out.
If you are a self-employed plumber earning £35,000 gross from your trade and you also receive £20,000 in rent from a buy-to-let property, your qualifying income is £55,000.
Even though neither source alone exceeds the £50,000 threshold, the combined total pushes you into the April 2026 cohort.
What Does NOT Count?
Understanding what to exclude is just as important. The following income sources do not count towards your MTD threshold:
- Employment income (PAYE): Wages from a job where you are an employee.
- Dividends: Income from shares, including those from your own limited company.
- Savings interest: Income from personal savings accounts.
- Pension income: Payments from state or private pensions.
This means a company director with a salary of £12,570 and dividends of £80,000 is not affected by MTD for Income Tax, provided their side hustle income remains below the threshold.
Hidden Traps for New Businesses
If you started trading part way through the tax year, HMRC will annualise your income to estimate a full year.
Imagine you started a business on 1 January 2025 and earned £15,000 gross by 5 April 2025. You only traded for three months. HMRC multiplies this by four to get an annualised figure of £60,000.
That calculation puts you over the £50,000 threshold. Consequently, you must comply with MTD from April 2026, even though your actual income in the tax year was only £15,000.
The MTD Threshold Timeline
HMRC uses your qualifying income from specific tax years to decide when you join the system.
- April 2026: Qualifying income over £50,000 (based on 2024/25 return).
- April 2027: Qualifying income over £30,000 (based on 2025/26 return).
- April 2028: Qualifying income over £20,000 (based on 2026/27 return).
Once you are mandated into MTD, you cannot simply opt out if your income drops the following year. You generally need your qualifying income to fall below £20,000 for three consecutive years before you can leave the system.
The Bottom Line
Qualifying income is the gatekeeper to MTD. The calculation is straightforward if you know the rules: add up your gross self-employment and property income before expenses.
Check your numbers now. If your qualifying income for 2024/25 exceeds £50,000, you have until April 2026 to get your digital systems in place.
