If your income takes a dip, do you still need to comply with Making Tax Digital?

Making Tax Digital (MTD) for Income Tax is about to pull into scope sole traders and landlords who have qualifying incomes over £50,000 a year.

As you might expect, should you cross that threshold, you will be obliged to adopt MTD and stay compliant with the new way of working.

The question of what happens should you slip below the threshold is a pertinent one and needs addressing so that preparations are not abandoned prematurely.

Clarity has now been provided on how dips in income should be handled, so you can know whether you are still in line for the first phase of MTD.

Does a reduction in income make you exempt from Making Tax Digital?

If you are looking at your finances and know that you will not be generating an income over £50,000 in the year ahead, or if you did not in this previous year, then you may assume that MTD does not apply to you.

However, your obligations were actually established during the 2024/2025 tax year.

If you had a qualifying income of over £50,000 during this period, you will need to follow MTD rules this year even if that is no longer the case.

This is due to it being possible to fall out of MTD obligations only when your qualifying income drops below the threshold for three consecutive years.

Even this will be more challenging going forward, as the threshold itself will be reduced first to £30,000 in 2027 and then to £20,000 in 2028.

This will mean that you will have to generate an income below each successive threshold to no longer qualify for MTD.

If you know that you will no longer be generating a qualifying income, then it is possible to make a declaration to HMRC.

In doing so, you will no longer have to follow MTD rules without waiting for three years, but it will be necessary to evidence why this is the case, such as by demonstrating that you no longer own the business or property that was generating the income.

Do I still need to file Making Tax Digital submissions if my income is nil?

If your income is nil during any period of time but will return in the future, it will still be necessary to make MTD filings.

A common cause for a temporary halt on earnings would be if you were to take maternity leave as a sole trader or self-employed individual, or if your rental properties become empty.

Even in these instances, you will need to keep up with digital record keeping and submit quarterly filings along with your annual statement as usual.

If you are on maternity leave, it might seem like tax obligations are not your highest priority, given that you are welcoming new life into the world.

However, HMRC do still expect to receive your tax filings even if no amount of tax needs to be paid.

This is where having expert support and guidance can be beneficial.

Our team is here to help you understand and stay compliant with your MTD obligations so that you are not caught out by the changes.

There is still time to get prepared for MTD before the first deadline hits and we can help make sure you are ready to go.