How does the income exemption work for MTD for ITSA?

In order to be within scope of MTD for ITSA, an individual must have qualifying income above £10,000 per year.  But how will this income threshold work in practice?

To start with, there are a couple of important points to note:

  • It applies to gross income or turnover, not profit
  • It applies to the total gross income where the individual has more than one trade or property business. For example, if the individual has £6,000 of rental income and £7,000 of sales from a sole trader business, they will exceed the limit and be in scope.

When applying the income threshold for any specific tax year, HMRC will look at the tax return for which the filing deadline fell just before the start of that tax year.

So, for example, for 2024/25, the first tax year for which MTD for ITSA will be mandated, HMRC will look at the figures for the return for 2022/23 (filing deadline 31 January 2024).  For 2025/26 they will look at the return for 2023/24 (filing deadline 31 January 2025) etc.

Which figures will HMRC look at?

HMRC have indicated they will look at the following SA return boxes in applying the £10,000 test:

  • Self-Employment Turnover  - either SA103F - Box 15 or SA103S - Box 9 or SA200 box 3.6 
  • Self-Employment Other Income - either SA103F - Box 16 or SA103S - Box 10 
  • UK Property Income - either SA105 Box 20 or SA200 box 6.1 
  • Other UK Property Income (grant of lease) - SA105 Box 22 
  • Other UK Property Income (reverse premiums) - SA105 Box 23 
  • Other UK Property Income (FHL) - SA105 Box 5 
  • Foreign Property Gross Income - SA106 Box 14 
  • Foreign Property Income (premiums) - SA106 Box 16 

The figures reported in these boxes will be combined and, if the total exceeds £10,000, the taxpayer will be mandated into MTD for ITSA from the start of the next tax year following the filing deadline for the return in question.

Income which is not declared on the SA return will not be taken into account when applying the £10,000 threshold.  This means that, for example, rent a room receipts below the £7,500 threshold, or trading or property income below £1,000 where the trading / property allowance is claimed, will not count towards the threshold (provided they are not included on the SA return). 

For example, an individual with £9,000 of trading income and £5,000 of rent a room income will not be mandated into MTD for ITSA, as the rent a room receipts are not reported in their tax return and therefore ignored for the purposes of the threshold test.

However, if the individual is mandated into MTD for ITSA anyway (i.e. because they have other income which takes them above the threshold) they will be required to account for all of their property or trading income under MTD.  This means that, for example, an individual with trading turnover of £15,000 and rent a room receipts of £5,000 will have to meet the MTD requirements for both their trade and their property income. 

What about new trades or businesses?

Where a source of trading or property income starts part way through a year (for example because the taxpayer has started a new trade) HMRC will annualise the turnover data, grossing it up to give an amount for the full tax year.  For example, if a trade starts on 1 January and has turnover of £3,000 to 5 April, that will be annualised to give a figure of £12,000 for the purposes of the threshold test.

However, the MTD regulations do provide for an alternative approach of applying a just and reasonable method if annualising ‘would work unreasonably or unjustly’.  This may be helpful for seasonal trades, where income is not expected to be even throughout the year, though HMRC have not yet confirmed their position.

What if income subsequently drops below the £10k threshold?

Once an individual is mandated into MTD for ITSA, they will only become exempt if their qualifying income falls below £10,000 for three consecutive tax years (based on filed tax returns, or quarterly updates where the deadline has not yet passed for filing the return for a year).

For example, let’s assume an individual has the following qualifying income:

  • 2022/23 - £12,000
  • 2023/24 - £9,000
  • 2024/25 - £5,000
  • 2025/26 - £5,000
  • 2026/27 - £3,000

This individual will be mandated into MTD for ITSA from 2024/25 as the income threshold is applied to the income for 2022/23 (i.e. the return due for filing on 31 January before the start of tax year 2024/25). It does not matter that their income in 2023/24 was below the threshold.

In order to be exempt, they will then have to have three years where they were within MTD, but their qualifying income was less than £10,000.  That means the earliest tax year this individual can be exempt from MTD for ITSA for is 2026/27.  

Depending on the facts and circumstances, it may be possible to apply for exemption on the grounds it is ‘not reasonably practicable’ for them to comply with MTD (often referred to as ‘digital exclusion’) provided they meet the requirements.