When your income falls: what GOV.UK says about opting out of MTD

Declan is fictional, but his situation is a common one. For years he let two flats, and the rent from both together took him over the threshold, so he has been keeping digital records and sending quarterly updates under Making Tax Digital (MTD) for Income Tax. Last year he sold one of the flats. The rent from the flat he kept now sits well below the threshold, and his first thought was that he could stop the quarterly routine straight away. Before he does anything, he wants to know what GOV.UK says about leaving. This guide sets that out, so that someone in his position can see which rules apply and when.

Why the rule looks at three years rather than one

GOV.UK’s guidance on qualifying income gives the rule for people who are already using MTD in a single sentence: “Once you start using the service, if your qualifying income drops below the relevant threshold for 3 tax years in a row, you can choose to opt out.” The part that matters most for Declan is the three years. As far as this rule goes, one lower year begins the count rather than ending it, so selling the flat starts the count for him rather than giving him the choice to opt out at once.

It is also worth noticing that opting out is something you choose. The rule says you can choose to opt out, so it is a step you take rather than something that happens to you, and staying in remains open. Both paths are covered below.

Selling the flat did not end Declan’s lettings, because he still lets the other one. GOV.UK’s page on ceasing income sources says: “If you stop renting out a UK property but still rent out other properties, then your property business is continuing, and you do not need to tell HMRC.” If both of his flats are in the UK, his property business is continuing rather than ceasing, and the guide to stopping a business or letting explains how that differs from a source that stops.

The two reasons GOV.UK gives for opting out

GOV.UK’s page on what to do if your circumstances change has its own section on opting out. It says: if you have been using Making Tax Digital for Income Tax, you can opt out if you no longer need to use it because you amended your Self Assessment tax return for the previous tax year taking your qualifying income below the relevant threshold or your qualifying income has been below the relevant threshold for 3 consecutive years.

The second reason is the three-year rule. The first one is narrower and depends on a change to a return you have already sent. GOV.UK’s qualifying income page explains how such a change is treated: “After the start of a tax year, if the change takes your qualifying income below the relevant threshold, you will not need to use Making Tax Digital for Income Tax for that tax year. If you have already signed up, you can continue using the service voluntarily or choose to opt out.” For Declan, that route would only matter if a correction to his previous return took his qualifying income below the threshold. His lower rent this year is not a change to an earlier return, so it is the three-year rule he needs to look at.

How GOV.UK’s example counts the three years

GOV.UK works through an example, which is the clearest way to see which years count. If your qualifying income is above £50,000 for the 2024 to 2025 tax year, you need to start using MTD from 6 April 2026. In GOV.UK’s example, you can then opt out after the end of the 2028 to 2029 tax year if your qualifying income is £20,000 or less based on:

• your tax return for the 2026 to 2027 tax year
• your tax return for the 2027 to 2028 tax year
• your fourth quarterly update for the 2028 to 2029 tax year

In that example, you would need to have sent your fourth quarterly update for the 2028 to 2029 tax year by 7 May 2029, and you would then not need to use MTD for the 2029 to 2030 tax year.

The third year works differently from the first two, because it is not tested on a tax return. HMRC will use income information from your fourth quarterly update for the third year to check if you can opt out. If you are opting out because your qualifying income was below the relevant threshold for 3 consecutive years, you will not need to wait until you send your tax return for the third year to opt out. GOV.UK does not give a separate example for later intakes, so if your own years are different, the safest course is to check them against GOV.UK’s page rather than assume they follow the same pattern.

How opting out works

GOV.UK describes opting out as a choice you make in your online account. If you are eligible to opt out, you will need to select this option in your HMRC online services account or agent services account. The option will only appear if you are eligible. You sign in through HMRC online services, or an accountant acting for you can use their agent services account.

It helps to know what changes before you choose. GOV.UK says that if you opt out:

• you will no longer need to create digital records or send quarterly updates
• any updates already sent will be deleted for the tax year you opt out
• you must send a Self Assessment tax return for that tax year
• you should find out if and when you need to use Making Tax Digital for Income Tax in the future

On the return itself, GOV.UK adds: “You do not need to use your Making Tax Digital for Income Tax software to send this tax return, but you can if you prefer.” The point about deleted updates is worth thinking about in advance, because the updates you have already sent for that year are removed and the Self Assessment return is what reports the year instead. GOV.UK also asks you to check whether you will need MTD in the future, but these pages say nothing more about what happens if your income rises again, so this guide does not either.

Staying in MTD after your income falls

Some people will prefer to keep going, perhaps because the quarterly routine is already set up and works well for them. You can continue using Making Tax Digital for Income Tax if you do not opt out. Your HMRC online services account will show that you’re using the service voluntarily.

GOV.UK’s opt-out section does not say whether anything else changes for someone who stays on this way. The guide to signing up for MTD voluntarily covers people who join before they are required to, but GOV.UK does not say whether those rules also apply to someone who stays on after their income falls, so it is a question to put to HMRC if it matters to you.

What happens to penalties if you become exempt

Penalties are where opting out and becoming exempt need to be kept apart. GOV.UK’s opt-out section does not mention penalties. The GOV.UK penalties page has a section for people who become exempt instead, and it begins: “If your circumstances change, you may become exempt from Making Tax Digital for Income Tax.” So what follows is GOV.UK’s account of exemption, and it should not be read as a description of what happens when someone opts out.

The position depends on the tax year. If you become exempt in the 2026 to 2027 tax year, you will return to the current late payment and late submission penalties for Self Assessment. If you become exempt in the 2027 to 2028 tax year, you will remain under the new penalties. From April 2027, the new penalties will apply to everyone who submits a personal Self Assessment tax return. Your penalty point threshold also falls from four points to two.

Points you already hold are adjusted when that happens. If you already have penalty points when your point threshold changes, your points will reduce so that you are no closer to your new threshold. GOV.UK’s example is someone with three points, who is one point away from the four-point threshold. If they become exempt, their points reduce to one, which leaves them still one point away from the two-point threshold. The guide to MTD penalties explains how the points and late payment rules work in the first place.

Where to go next

If your income has stopped altogether rather than fallen, because a business has closed or your last letting has ended, the guide to stopping a business or letting explains what GOV.UK says is still owed and when MTD ends. If your reason for wanting to stop is not your income but that you can no longer reasonably use digital tools, that is a question of exemption rather than opting out, and the guide to MTD exemptions explains who is exempt and how to apply. If you are not sure what counts towards your total in the first place, the main MTD guide explains qualifying income, and the Am I in MTD? calculator can check your figures against each threshold. For the rules themselves, GOV.UK’s page on working out qualifying income and its section on what to do if your circumstances change are the places to check.

Questions people ask about opting out of MTD