Preparing for Phase 2: MTD for 30K+ Income

Getting Ready for MTD Phase 2: The £30,000 Threshold from April 2027

Last updated: February 2026

Making Tax Digital for Income Tax launches in phases. Phase 1 starts on 6 April 2026 for taxpayers with qualifying income above £50,000. Phase 2 follows one year later, on 6 April 2027, pulling in everyone with qualifying income above £30,000. If your combined gross self-employment and UK property income falls between £30,001 and £50,000, you have roughly 14 months to prepare. This article sets out exactly what Phase 2 involves, what you should be doing now, and how lessons from Phase 1 can help you avoid common mistakes.

What Phase 2 means

From 6 April 2027, sole traders and landlords with qualifying income above £30,000 must keep digital records and submit quarterly updates to HMRC using MTD-compatible software. Qualifying income is your gross income from self-employment plus gross UK property income. It is based on turnover, not profit. You do not subtract expenses, pension contributions, or any allowances before measuring it against the threshold.

This is a critical distinction. A sole trader turning over £38,000 with £15,000 in expenses has a profit of £23,000 but a qualifying income of £38,000. That person is firmly within Phase 2.

The threshold assessment is based on your Self Assessment return for 2025/26 (due by 31 January 2027). HMRC will use the figures on that return to determine whether you meet the £30,000 threshold. If you do, your first MTD obligations begin in the 2027/28 tax year.

The full MTD rollout timeline

Phase 2 is the largest single expansion of MTD for Income Tax. HMRC estimates that it will bring approximately 900,000 additional taxpayers into the system. Many of these are sole traders running small businesses and landlords with modest rental portfolios who have never used accounting software before.

What you must do under MTD

Once you are within MTD, four obligations apply each tax year:

1. Keep digital records – All business income and expenses must be recorded in MTD-compatible software. Paper records fed into a spreadsheet at year end will not be sufficient.
2. Submit quarterly updates – You send a summary of income and expenses to HMRC four times per year, covering the standard quarterly periods.
3. Submit a Final Declaration – After the tax year ends, you confirm your full-year figures, apply reliefs and allowances, and finalise your tax position. This replaces the traditional Self Assessment return.
4. Use compatible software – The software must connect to HMRC’s systems via their API. You cannot submit updates through the HMRC online portal manually.

The quarterly deadlines follow a fixed pattern. For the 2027/28 tax year (Phase 2’s first year), the deadlines are:

The Final Declaration for 2027/28 is due by 31 January 2029.

Lessons from Phase 1

Phase 1 taxpayers (qualifying income above £50,000) enter MTD on 6 April 2026. Their experience during 2026/27 will reveal practical issues that Phase 2 taxpayers can learn from. Several patterns are already predictable based on the MTD for VAT rollout and HMRC’s pilot programmes:

Software setup takes longer than expected. Choosing software, migrating existing records, connecting to HMRC, and learning the interface is not a single afternoon’s work. Sole traders who left MTD for VAT preparation until the last month often missed their first filing deadline. Start early.

The soft-landing period is Phase 1 only. HMRC has confirmed a soft-landing period for 2026/27, meaning Phase 1 taxpayers will not receive penalty points for their first four quarterly updates during that year. This soft-landing does not apply to Phase 2. From your first quarterly update in August 2027, late submissions will accumulate penalty points. Four late submissions trigger a £200 fine.

Quarterly updates are simpler than people fear. A quarterly update is a summary of income received and expenses paid during the period. It is not a mini tax return. You do not calculate tax owed or apply allowances at this stage. If your records are up to date in your software, submitting takes minutes.

Agent authorisation matters. If you use an accountant, they need to be authorised as your agent in HMRC’s system specifically for MTD for Income Tax. Existing Self Assessment agent authorisation does not automatically carry over. This is a separate process that can take several weeks.

Worked example: preparing for Phase 2

Aisha is a self-employed interior designer in Manchester. In 2025/26 she has the following income:

• Gross self-employment income: £33,000
• Gross UK property income (one buy-to-let flat): £5,000
• Total qualifying income: £38,000

Aisha’s qualifying income exceeds £30,000, so she falls within Phase 2 from 6 April 2027. Here is her preparation timeline:

February – April 2026: Assess and plan. Aisha reviews her 2024/25 income to estimate whether she is likely to exceed £30,000 in 2025/26. Her self-employment has been steady at £30,000–£35,000 for three years, and her rental income is consistent. She is almost certainly within Phase 2.

May – August 2026: Choose software. Aisha currently tracks income in a spreadsheet and gives her accountant a folder of receipts each January. She needs MTD-compatible software that handles both self-employment and property income. She reviews HMRC’s list of recognised software providers and trials two options. She chooses one that suits her workflow and budget, settling on a package costing £15 per month.

September – December 2026: Set up and practise. Aisha sets up her software, enters her opening balances, and begins recording transactions digitally. She runs parallel records alongside her spreadsheet for the remainder of 2025/26 so she can check the software produces accurate figures. She also asks her accountant to apply for MTD for Income Tax agent authorisation.

January 2027: File 2025/26 Self Assessment. Aisha files her 2025/26 return by 31 January 2027. The return confirms qualifying income of £38,000. HMRC uses this to confirm she is within Phase 2.

April 2027 onwards: MTD goes live. From 6 April 2027, Aisha records all business and property income digitally. Her first quarterly update covers 6 April to 5 July 2027 and is due by 7 August 2027. A typical quarter looks like this:

Aisha submits this through her software. The process takes about 10 minutes because she has been entering transactions as they occur. Her Final Declaration for 2027/28 is due by 31 January 2029, at which point she applies reliefs, claims capital allowances on her rental property, and finalises her tax calculation.

What to do now: a preparation checklist

If you think your qualifying income for 2025/26 will exceed £30,000, take these steps now:

1. Calculate your qualifying income. Add your gross self-employment income to your gross UK property income. Use turnover, not profit. If the total is above £30,000, you are in Phase 2.
2. Research software options. HMRC maintains a list of compatible software on GOV.UK. Look for software that handles your specific income types (self-employment, property, or both). Free options exist for simpler situations.
3. Start keeping digital records now. Even before MTD is mandatory for you, switching to digital record-keeping gives you months of practice. Errors made during a voluntary period have no compliance consequences.
4. Talk to your accountant. If you use an accountant or tax adviser, discuss MTD with them. They need to plan for agent authorisation, software compatibility with their systems, and the quarterly filing rhythm.
5. Watch Phase 1 closely. Phase 1 starts in April 2026. HMRC guidance, software updates, and practical tips from Phase 1 taxpayers will all be available before your obligations begin.
6. Do not wait until January 2027. Your 2025/26 Self Assessment return (due January 2027) determines your Phase 2 status. But by that point you should already have software in place and be comfortable using it.

Software costs and options

Phase 2 taxpayers tend to have lower incomes than Phase 1 taxpayers, so software cost is a genuine concern. The market currently offers three tiers:

• Free software – HMRC’s own basic tool and a small number of free third-party options. Suitable for sole traders with straightforward income and few transactions. Limited features for property income or multiple income streams.
• Budget software (£5–£15 per month) – Covers self-employment and property income, bank feeds, basic reporting. Adequate for most Phase 2 taxpayers.
• Full accounting software (£15–£40 per month) – Invoicing, payroll integration, multi-currency, advanced reporting. More than most Phase 2 taxpayers need, but useful if your business is growing.

The cost of software is an allowable business expense for tax purposes. A sole trader paying £12 per month can deduct £144 per year from their taxable profit.

Common misconceptions about Phase 2

“My profit is under £30,000 so I am not affected.” Wrong. The threshold is based on gross income (turnover), not profit. A plumber turning over £35,000 with £12,000 in expenses has a profit of £23,000 but qualifying income of £35,000. They are within Phase 2.

“Only self-employment counts.” Wrong. Qualifying income includes UK property income. A teacher with £8,000 from private tutoring and £25,000 from rental properties has qualifying income of £33,000 and is within Phase 2.

“I can use my existing spreadsheet.” Possibly, but only through bridging software. A standalone spreadsheet cannot submit data to HMRC. You either use full MTD software or use bridging software that connects your spreadsheet to HMRC’s API. Bridging software is available but adds a manual step to each quarterly submission.

“The soft-landing means I won’t be penalised.” The soft-landing period applies only to 2026/27 (Phase 1’s first year). Phase 2 taxpayers starting in 2027/28 are subject to the full penalty regime from day one. Each late quarterly update earns one penalty point. Four points trigger a £200 penalty.

If your income fluctuates around £30,000

Some taxpayers have qualifying income that varies year to year, sometimes above and sometimes below £30,000. HMRC determines your MTD status based on the Self Assessment return for the year before MTD obligations would start. If your 2025/26 return shows qualifying income above £30,000, you enter Phase 2 for 2027/28 regardless of what happens to your income in 2027/28 itself.

Once you are within MTD, you remain within it until HMRC confirms you are no longer required to comply. A single year of lower income does not automatically remove you. If your income drops below £30,000 in subsequent years, you may be able to apply to leave MTD, but the process is not automatic.

For a broader overview of how MTD for Income Tax affects sole traders and landlords across all phases, see our main guide.

Frequently asked questions

When does MTD Phase 2 start?

Phase 2 starts on 6 April 2027. It applies to sole traders and landlords with qualifying income above £30,000 based on their 2025/26 Self Assessment return.

Is qualifying income based on turnover or profit?

Turnover. Qualifying income is your gross self-employment income plus gross UK property income. You do not deduct expenses, allowances, or reliefs before measuring it against the £30,000 threshold.

Does the soft-landing period apply to Phase 2?

No. The soft-landing period (no penalty points for the first four quarterly updates) applies only to 2026/27, which is Phase 1’s first year. Phase 2 taxpayers are subject to the full penalty points system from their first quarterly update in August 2027.

What software do I need?

You need MTD-compatible software recognised by HMRC. Options range from free HMRC tools to commercial accounting packages costing £5–£40 per month. The software must be able to submit quarterly updates and a Final Declaration to HMRC via their API.

Can I still use an accountant under MTD?

Yes. Many accountants will manage quarterly submissions on your behalf. They need MTD for Income Tax agent authorisation from HMRC, which is a separate process from existing Self Assessment authorisation. Discuss this with your accountant well before April 2027.

Sources

• GOV.UK: Making Tax Digital for Income Tax
• GOV.UK: Find software that is compatible with Making Tax Digital for Income Tax
• GOV.UK: Sign up your business for Making Tax Digital for Income Tax
• GOV.UK: Making Tax Digital for Income Tax – stakeholder communications pack