Can You Leave MTD? How to Opt Out If Your Income Drops
Last updated: February 2026
Once HMRC brings you into Making Tax Digital for Income Tax, you cannot simply walk away after one quiet year. The rules require your qualifying income to remain below the relevant threshold for three consecutive tax years before you become eligible to opt out. This article explains the exit rules in full, including what happens when you cease an income source, how voluntary participants can leave, and what to do if you believe HMRC has mandated you incorrectly.
The basic rule: three consecutive years below the threshold
If you are mandated into MTD for Income Tax and your qualifying income subsequently falls, you must stay within the system until your income has been below the relevant threshold for three consecutive tax years. Only after that three-year period can you choose to opt out.
Qualifying income means your combined gross income from self-employment and UK property. It is turnover, not profit after expenses. The thresholds that determine when you enter MTD are:
| Phase | Start date | Threshold |
|---|---|---|
| Phase 1 | 6 April 2026 | Qualifying income above £50,000 |
| Phase 2 | 6 April 2027 | Qualifying income above £30,000 |
| Phase 3 | 6 April 2028 | Qualifying income of £20,000 or more |
These same thresholds govern when you can exit. If you entered under Phase 1 because your qualifying income exceeded £50,000, your income must drop below £50,000 for three full tax years before you can leave. HMRC designed this rule to prevent taxpayers with fluctuating income from constantly moving in and out of the system.
The GOV.UK guidance on qualifying income confirms: “Once you start using the service and your qualifying income drops below the relevant threshold for 3 tax years in a row, you can choose to opt out.”
Worked example: a freelancer whose income drops
James is a self-employed graphic designer in Leeds. In 2024/25, his gross self-employment income is £62,000. He enters MTD under Phase 1 from 6 April 2026 and begins submitting quarterly updates through compatible software.
In 2026/27, James reduces his working hours to care for an elderly parent. His gross income falls to £38,000. He wonders whether he can leave MTD immediately. He cannot. Here is how the three-year rule plays out:
| Tax year | Gross income | Below £50,000? | Consecutive years below |
|---|---|---|---|
| 2026/27 | £38,000 | Yes | 1 |
| 2027/28 | £41,000 | Yes | 2 |
| 2028/29 | £35,000 | Yes | 3 |
| 2029/30 | £33,000 | — | Eligible to opt out |
James must complete quarterly updates for the full three years (2026/27, 2027/28 and 2028/29) while his income remains below £50,000. Only from 2029/30 onwards can he choose to leave MTD. If his income had risen back above £50,000 in any of those three years, the clock would reset.
Note that James’s income of £38,000 in 2026/27 is still above the Phase 2 threshold of £30,000. However, because he was originally mandated under the £50,000 Phase 1 threshold, it is that threshold he must stay below for three consecutive years. If his income subsequently falls below £30,000 for three consecutive years as well, he would also no longer be caught by Phase 2.
What happens when you cease an income source
If you stop trading or sell a rental property, different rules apply depending on whether you have other qualifying income sources remaining.
All qualifying income ceases
If you cease all self-employment and property income entirely, you can notify HMRC and exit MTD without waiting three years. You will need to submit your final quarterly update covering the period up to cessation, then inform HMRC that your qualifying income sources have ended. HMRC will cancel your MTD obligations.
For example, if you are a sole trader who closes your business in October 2027 and has no rental income, you would submit your quarterly update for the period covering the cessation, notify HMRC, and then submit a Final Declaration for that shortened year. You would not need to continue quarterly reporting beyond the cessation date.
One source ceases but another continues
If you have multiple qualifying income sources and one ceases, you remain in MTD for the continuing source. HMRC’s guidance confirms that ceased self-employment or property income is still included in your qualifying income calculation if you have another continuing source of self-employment or property income.
Suppose you run a freelance consultancy (gross income £35,000) and own a rental property (gross rental income £22,000). Your combined qualifying income of £57,000 brings you into Phase 1. If you sell the rental property, you still have £35,000 from self-employment. You remain in MTD and must continue quarterly updates for your consultancy income. To leave, your remaining gross self-employment income would need to stay below the £50,000 threshold for three consecutive tax years.
Notifying HMRC of a ceased source mid-year
There is a facility to inform HMRC that an income source has ceased during the tax year. Once you submit the quarterly update covering the period up to cessation, you should notify HMRC before the next quarterly update is due. This removes the quarterly obligation for that specific source for the remainder of the year. Your MTD-compatible software should support this notification process.
Voluntary participants: leaving at any time
Not everyone in MTD is there because they have to be. If your qualifying income falls below the mandatory thresholds but you chose to sign up voluntarily, you can leave MTD at any time. The three-year waiting period does not apply to voluntary participants.
HMRC encourages early voluntary sign-up so that taxpayers can familiarise themselves with the software and quarterly reporting process before it becomes mandatory. If you signed up voluntarily and decide the administrative burden is not worth it, you can opt out without penalty and revert to annual Self Assessment returns.
However, if you later become mandated because your qualifying income rises above a threshold, you would re-enter MTD on a mandatory basis and the standard exit rules would then apply.
Income rising back above the threshold
The three-year clock resets if your qualifying income goes back above the threshold in any year during the waiting period. Using the earlier example, if James earned £38,000 in 2026/27 and £41,000 in 2027/28 but then £52,000 in 2028/29, the count restarts. He would need three new consecutive years below £50,000 before becoming eligible to opt out.
This is a particular concern for taxpayers with variable income. A freelancer who typically earns £45,000 but lands one large project pushing income above £50,000 would reset the clock entirely. The rule is based on actual qualifying income as reported, not on expected or average income.
What if you believe you should not be mandated?
HMRC will write to taxpayers it believes are within scope of MTD. However, there are situations where you might disagree with HMRC’s assessment. Common reasons include:
- Incorrect qualifying income calculation: HMRC bases its assessment on your most recent Self Assessment return. If that return contained an error that inflated your gross income, your qualifying income figure may be wrong.
- Income sources that have since ceased: If your qualifying income exceeded the threshold in the reference year but you have since closed a business or sold a property before the MTD start date, you may not need to register.
- Exemption eligibility: Foster carers, those without a National Insurance number, digitally excluded individuals, and those with Power of Attorney or Court of Protection appointees may qualify for exemption.
If you believe you have been incorrectly mandated, you should contact HMRC as soon as possible. The GOV.UK guidance states: “You should contact HMRC, if you do not think you need to use Making Tax Digital for Income Tax.” HMRC will review your qualifying income and confirm whether you are within scope.
If you have already been brought into MTD and you disagree with a penalty issued for late submission, you can appeal. HMRC follows a standard process: you have 30 days from the penalty notice to appeal, HMRC reviews the appeal, and if no agreement is reached, you can request an independent review or take the matter to the First-tier Tribunal. The penalties for non-compliance page explains the points-based system and late payment charges in detail.
The interaction with lower thresholds
As MTD rolls out in phases, the income thresholds decrease. This creates an important interaction for taxpayers whose income sits between threshold bands.
Consider a landlord who enters MTD under Phase 1 in April 2026 with qualifying income of £55,000. Their income drops to £42,000 in 2027/28. While this is below the £50,000 Phase 1 threshold, it remains above the £30,000 Phase 2 threshold that takes effect from 6 April 2027. In practice, this taxpayer would remain mandated under Phase 2 regardless of the three-year waiting period, because their income exceeds the newly applicable threshold.
From 6 April 2028, the threshold drops to £20,000. At that point, any taxpayer with qualifying income of £20,000 or more is within scope. The opt-out calculation then uses the £20,000 threshold. Your qualifying income would need to remain below £20,000 for three consecutive tax years before you could exit.
Practical steps if you want to leave MTD
If your income has dropped and you believe you may become eligible to opt out, take these steps:
- Track your qualifying income carefully each year. Record gross self-employment turnover and gross rental income separately. Remember that qualifying income is based on turnover, not profit.
- Continue quarterly reporting while you wait. You must submit all four quarterly updates and your Final Declaration each year until you formally opt out. Missing submissions during the waiting period will still attract penalty points.
- Check which threshold applies to you. As lower thresholds come into effect, you may still be mandated under a lower phase even if your income has dropped below the phase under which you originally entered.
- Notify HMRC promptly if an income source ceases. This removes quarterly obligations for that source and may affect your overall position.
- Contact HMRC or your accountant when the three-year period ends. Opting out is a choice, not automatic. You need to actively notify HMRC that you wish to leave.
For more answers on eligibility, thresholds and the quarterly reporting process, see our frequently asked questions page.
Frequently asked questions
- Can I opt out of MTD immediately if my income drops below the threshold?
- No. Your qualifying income must remain below the relevant threshold for three consecutive tax years before you can choose to opt out. During that time, you must continue submitting quarterly updates and a Final Declaration each year.
- What if I signed up for MTD voluntarily and want to leave?
- Voluntary participants can leave MTD at any time without waiting three years. You simply notify HMRC that you wish to opt out. However, if your income later rises above a mandatory threshold, you will be brought back in on a compulsory basis.
- Do I still need to file a Self Assessment return if I leave MTD?
- Yes. Leaving MTD does not remove your obligation to report income to HMRC. You revert to filing an annual Self Assessment tax return instead of quarterly digital updates. Your tax liability and payment dates remain unchanged.
- What happens if I close my business entirely?
- If all your qualifying income sources cease (no remaining self-employment or property income), you can notify HMRC and exit MTD without waiting three years. Submit your final quarterly update covering the period to cessation, notify HMRC of the cessation, and file a Final Declaration for the shortened year.
- Can I appeal if HMRC says I am within scope of MTD but I disagree?
- You should contact HMRC directly if you believe you should not be mandated. Common reasons include an incorrect qualifying income figure on your last Self Assessment return or an income source that has ceased since then. HMRC will review your position and confirm whether you are within scope.
Need help with MTD?
Jack Ross Chartered Accountants advises sole traders and landlords on MTD obligations, including eligibility, opt-out rules and quarterly reporting. Whether your income is rising, falling or uncertain, our team can manage the process for you. As an established Manchester-based accountancy practice, we handle MTD compliance so you can focus on your business. Get in touch
