What Is Qualifying Income for MTD? [Fully Explained]

Making Tax Digital (MTD) is transforming how sole traders and landlords report their income to HMRC. Instead of filing one Self Assessment tax return each year, many individuals will soon need to keep digital records and submit updates more regularly using compatible software.

One of the most important concepts within this system is qualifying income. Whether you need to follow MTD rules depends largely on this figure. 

This guide explains what qualifying income for MTD is, how it’s calculated, when it applies, and what it means for your MTD obligations.

Key points

• Qualifying income determines MTD eligibility 💰
  Your gross income from self-employment and property is used to decide whether you must comply with MTD. Profit, dividends, pensions, interest, or capital gains don’t count.
• Accurate records make compliance easier 📃
  Your Self Assessment tax return, accounting software, bank records, invoices, and rental statements are key sources for determining qualifying income. Maintaining organised records throughout the year reduces errors and stress.
• Digital reporting is essential under MTD 💻
  You must keep digital records, submit quarterly updates to HMRC, and file a final annual declaration. This improves accuracy and provides real-time insight into your tax position.
• ANNA can track your qualifying income automatically 🚀
  ANNA keeps your business income and expenses organised in real time, with automatic transaction categorisation, invoicing, tax estimates, and MTD-ready tax filing. This helps you see where you stand throughout the year, rather than manually calculating whether you're approaching the MTD threshold.

What is your qualifying income for MTD?

Your qualifying income is the total gross income you receive from self-employment and property before any expenses or deductions are taken off.

Qualifying income has several important characteristics:

• It’s calculated before expenses are deducted
• It combines both self-employment income and property income
• It’s based on gross income, not profit
• It determines whether you have to comply with Making Tax Digital for Income Tax

In simple terms, it’s the full amount you earn from your business activities and rental properties, not the profit you keep after costs. 

It’s important to understand that qualifying income is used only to determine your eligibility for MTD. It’s not the same as taxable profit, and it doesn’t determine how much tax you owe. 

Understanding Making Tax Digital for Income Tax

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is part of the UK government’s plan to modernise tax reporting. Instead of submitting one annual return based on paper records or spreadsheets, affected taxpayers must:

• Keep digital records of income and expenses
• Submit quarterly updates to HMRC using MTD-compatible software
• Confirm their final tax position with an annual submission

The goal is to improve accuracy, reduce errors, and give taxpayers a clearer picture of their tax obligations throughout the year.

However, not everyone is liable immediately – your compliance timing depends primarily on your qualifying income.

The MTD income thresholds

Making Tax Digital for Income Tax is being introduced in phases.

The current rollout timeline is:

• From April 2026: deadline for individuals with a qualifying income over £50,000 
• From April 2027: deadline for individuals with a qualifying income over £30,000 
• From April 2028: deadline for individuals with a qualifying income over £20,000 

For example, if you earn £20,000 from freelancing and £15,000 from property, your qualifying income is £35,000, which means you’ll need to comply from April 2027.

HMRC determines whether you must join MTD using the information from your most recent Self Assessment tax return. If your reported qualifying income exceeds the relevant threshold, you’ll be required to follow MTD rules from the start of the corresponding tax year.

The government has confirmed the £20,000 threshold for April 2028, and may expand MTD further in future, but any additional changes would be announced in advance.

Understanding your qualifying income now helps you prepare in advance, choose compatible software, and avoid having to manage your obligations in a rush when MTD becomes mandatory for you.

What counts as qualifying income?

Below is a detailed breakdown of what is included:

1. Self-employment income

Self-employment income covers money earned from any business activity where you are trading in your own name as a sole trader.

This includes people who:

• Work as freelancers, such as designers, writers, developers, consultants, marketers, and photographers
• Run retail, service, hospitality, or online businesses
• Operate as contractors providing services directly to clients
• Work in the gig economy, such as delivery drivers or ride-share drivers
• Sell goods through online platforms or marketplaces
• Carry out part-time or side-hustle work alongside employment

If you are registered for Self Assessment as a sole trader, your trading income most likely counts.

What is included within self-employment income?

For MTD purposes, qualifying income includes all business income received, such as:

• Payments from customers or clients
• Cash payments
• Bank transfers
• Card payments
• Income received via online platforms
• Foreign income from overseas clients
• Advance payments and deposits
• Barter income, where goods or services are exchanged and have monetary value

It doesn’t matter:

• Whether the income is regular or occasional
• Whether it’s your main income or a secondary activity
• Whether you have profits
• Whether you operate full-time or part-time

If it’s trading income, it counts toward your total qualifying income.

2. Property income

Rental income is also included in the calculation. This applies if you receive income from:

• Residential rental properties
• Commercial rental properties
• Furnished holiday lets
• Renting out a room in your home (above the Rent a Room Scheme threshold of £7,500)
• Overseas rental properties

For MTD purposes, you must use the gross rental income, which means the total rent received before deducting:

• Letting agent fees
• Maintenance and repairs
• Insurance
• Mortgage interest
• Service charges
• Utilities, where applicable

Even if your rental property makes little or no profit after costs, the full rental income still counts toward the threshold.

What doesn’t count as qualifying income?

The following income types don’t count toward the MTD thresholds set by HMRC:

1. Employment income

Income taxed under PAYE doesn’t count.

This includes:

• Salary from a full-time or part-time job
• Bonuses from employment
• Company benefits processed through payroll

For example, if you earn £45,000 in salary and £12,000 from freelancing, only the £12,000 freelance income counts toward qualifying income.

2. Dividend income

Income from shares or company ownership doesn’t count.

This includes:

• Dividends from shares and investments
• Dividends paid from your own limited company

If you operate through a limited company and pay yourself dividends, those dividends don’t count toward MTD qualifying income for Income Tax purposes.

3. Interest income

Bank interest and savings interest are excluded.

This includes:

• Interest from savings accounts
• Fixed-term deposit interest
• Peer-to-peer lending interest

Even though interest income may be taxable, it’s not considered trading or property income. As a result, it doesn’t contribute toward the MTD income thresholds.

4. Pension income

Pension income isn’t included.

This covers:

• State Pension
• Private pensions
• Workplace pensions
• Annuities

Even if your pension income is substantial, it doesn’t count toward qualifying income for MTD.

5. Capital gains

Income from selling assets is excluded.

This includes gains from:

• Selling property
• Selling shares
• Selling business assets
• Selling cryptocurrency

Capital gains are taxed separately under Capital Gains Tax rules. Even large, one-off gains won’t affect whether you need to comply with MTD for Income Tax.

6. Partnership income

Partnership income is currently outside the scope of MTD for Income Tax for sole traders and landlords.

MTD for partnerships is planned to be introduced separately, with its own timeline and reporting requirements.

If you also earn separate income as a sole trader or landlord, only that income counts toward your qualifying income threshold.

Where to find your qualifying income figures

You can find your qualifying income figures in:

• Your Self Assessment tax return: Your most reliable reference is your Self Assessment tax return. Look for the total income reported in the self-employment and property sections, not the profit figure.
• Your accounting software: If you use accounting software, you can usually view your total income through your profit and loss report or income summary.
• Your business bank account records: Review your incoming payments over the tax year. This can help confirm your total income, especially if you are preparing to file your tax return.
• Your invoices and rental records: Invoice totals and rental statements provide a clear record of income received.

Keeping accurate, organised records throughout the year makes it much easier to calculate your qualifying income and monitor your MTD eligibility.

How MTD changes your reporting responsibilities

If your qualifying income exceeds the threshold, you’ll need to follow new reporting rules under Making Tax Digital.

These include:

• Keeping digital records: You must maintain digital records of your income and expenses using compatible software. 
• Submitting quarterly updates: You’ll need to send summary updates to HMRC every three months. These updates show your business income and expenses for that period.
• Submitting a final declaration each year: At the end of the tax year, you’ll submit a final declaration confirming your income, claiming allowances, and finalising your tax position.

This replaces the single annual Self Assessment tax return with a more structured, ongoing reporting process.

How digital tools help you stay compliant

Because MTD requires digital record-keeping and reporting, using the right tools is essential.

Manual spreadsheets can work in some cases, but they increase the risk of errors, missing information, and additional admin work.

Using dedicated software can help you:

• Automatically track and categorise your income
• Monitor your qualifying income throughout the year
• Maintain compliant digital records
• Prepare and submit required updates
• Reduce manual data entry
• Improve accuracy and organisation

This makes it easier to stay compliant and reduces the administrative burden of managing your taxes.

It also gives you better insight into your business performance and tax obligations.

How ANNA can help you track your qualifying income

Tracking your qualifying income doesn’t have to be complicated. With ANNA, your finances are automatically organised and monitored in real time, giving you a clear view of your income and business activity without the need for manual calculations or spreadsheets.

Here’s what ANNA can do for you:

• Automatic income and expense tracking: Captures, categorises, and logs every transaction into your business account automatically, ensuring everything is recorded for accurate qualifying income calculations
• Real-time tax estimates: Calculates estimated Corporation Tax and VAT liabilities as money comes in, keeping you informed of your tax position at all times
• Smart money pots: Sets aside a portion of your income automatically into a dedicated tax pot, ensuring funds are available for HMRC payments when needed
• Smart invoicing: Creates, sends, and chases invoices automatically, while matching and recording payments to track all income accurately
• Clear separation of business and personal finances: Maintains separate business and personal accounts, giving a real-time, accurate view of business finances
• Free automated MTD calculation and filing: Calculates and submits Income Tax Self Assessment, quarterly updates, and final filing for free for the first year. When you sign up for our MTD service, we will file your 2026/27 Self Assessment for free as well. 
• Automated reminders and 24/7 support: Sends reminders for all tax deadlines and provides round-the-clock support to answer your questions

So, try ANNA out today for free, and get ready for MTD without stress.