What Counts as Qualifying Income for MTD ITSA?

Your qualifying income determines whether and when you must use Making Tax Digital for Income Tax (MTD ITSA). Getting this figure wrong, either over- or underestimating it, leads to either missing a compliance deadline or preparing unnecessarily. This article explains exactly what counts, what does not, and how HMRC works it out.

What Qualifying Income Means

Qualifying income is the total gross income you receive from self-employment and property in a tax year, before deducting any expenses. It is not your profit. It is not your taxable income. It is the turnover figure from those two specific sources combined.

HMRC uses this figure to decide which phase of MTD ITSA applies to you:

HMRC assesses your qualifying income by reviewing the Self Assessment tax return you submitted for the relevant tax year. If your income exceeds the threshold, HMRC will write to you. However, the rules state that even if you do not receive a letter, you must still check your own position and sign up if required.

What Is Included in Qualifying Income

Self-employment income

All gross income from self-employment counts. This includes sales, fees, and any other trading receipts, before expenses are deducted. If you run more than one self-employed business, the gross income from all of them is combined into a single qualifying income figure.

UK and foreign property income

Rental income from UK residential and commercial property counts. So does income from overseas property if you are UK tax-resident. Your UK and foreign property sources are added together with your self-employment income.

Your share of jointly owned property

If you own a property jointly, only your share of the income counts. If a property generates £60,000 in rental income and you hold a 50% share, your qualifying income from that property is £30,000.

If you only receive your share of the income after expenses have already been deducted (for example, a net figure from a letting agent under a joint arrangement), HMRC will use that net figure for your qualifying income.

Ceased income sources

If a source of self-employment or property income ceased after you submitted your last tax return, it still counts towards your qualifying income, provided you have at least one other continuing source. For example, if you had three self-employment sources on your 2024-25 return and one ceased mid-year, but the other two continue, all three sources are included.

If all of your self-employment and property income sources have ceased since your last return, you are not required to use MTD ITSA. You should inform HMRC.

Bare trust and interest in possession trust income

If you are a beneficiary of a bare trust, any property or trading income you are entitled to counts. If you are a beneficiary of an interest in possession trust and the income is paid directly to you bypassing the trustees, it also counts.

Transactions in UK land (continuing sources)

If income from transactions in UK land is treated as trading profits and spans more than one tax year, it counts towards qualifying income.

Disguised investment management fees and income-based carried interest

These are treated as profits of a specific trade and count towards qualifying income.

What Is Not Included

The following sources of income do not count towards qualifying income for MTD ITSA, even if you declare them through Self Assessment:

• Employment income (PAYE): Your salary or wages from employment.
• Partnership profits as an individual partner: Your share of profit from a partnership does not count. Note: you will still need to declare it in your final declaration using compatible software once you are in the MTD ITSA system.
• Dividends: Including dividends from your own limited company.
• State Pension and private pensions.
• Income from UK Real Estate Investment Trusts (REITs) or Property Authorised Investment Funds (PAIFs).
• Qualifying care relief: If you receive qualifying care relief (for example, as a foster carer or kinship carer), that income does not count. HMRC guidance also confirms that qualifying care relief recipients are not required to use MTD ITSA before April 2027.
• Basis period transition profits: If you have transition profits arising from the basis period reform affecting the 2024-25 tax year and the four years after, those amounts do not count.
• One-off transactions in UK land: If the income falls within a single tax year only and is not a continuing source, it does not count.

Short Accounting Periods

If you became a sole trader part-way through a tax year, HMRC will annualise your income to calculate qualifying income. For example, if you traded for six months and earned £26,000, HMRC treats your annual qualifying income as £52,000.

If you receive income from property and your accounting period is shorter than 12 months, you must annualise your income yourself before checking whether the threshold applies.

VAT and the Qualifying Income Figure

If you are VAT-registered and use the cash basis, you can choose to declare your business income including or excluding VAT. If you include VAT in your declared income, it counts towards qualifying income for MTD ITSA purposes.

How HMRC Assesses You, and What Happens if You Amend Your Return

HMRC looks at the Self Assessment return you submitted for the relevant year. If you subsequently amend your return and the amendment pushes your income above a threshold, that amendment will not trigger MTD ITSA obligations for the tax year that has already started. HMRC will consider it for future years.

Amendments that reduce your income below a threshold may be considered.

A Common Mistake: Confusing Profit with Qualifying Income

Many sole traders and landlords incorrectly use their taxable profit figure when assessing whether MTD applies. The check is based on gross income (turnover), not profit. A sole trader with £55,000 gross income but £20,000 of expenses, leaving a £35,000 profit, still has qualifying income of £55,000. That crosses the Phase 1 threshold.

Similarly, a landlord with a £42,000 rental income who claims mortgage interest relief and other allowable expenses down to a taxable profit of £18,000 still has qualifying income of £42,000: above the Phase 2 threshold.

What This Means for You

Check the gross income figures on your Self Assessment returns for the relevant years, not the profit or taxable income lines. Add your self-employment and property income sources together (excluding the items listed above). Compare that total to the phase thresholds.

If you are on the boundary, or if your income varies significantly year to year, review each year's position separately. The threshold check is done annually, not as a rolling average.

For a full overview of MTD ITSA including software requirements, deadlines, and the sign-up process, see the DigiTaxHub MTD guide. For a step-by-step preparation walkthrough, see our MTD sole trader checklist.

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DigiTaxHub.co.uk is an independent information resource and is not affiliated with or endorsed by HMRC. This article is for information purposes only and does not constitute tax or financial advice. Always verify current rules at GOV.UK and speak to a qualified accountant if you are unsure.