Preparing for Phase 3: MTD for 20K+ Income

Getting Ready for MTD Phase 3: The £20,000 Threshold from April 2028

Last updated: February 2026

Making Tax Digital for Income Tax arrives in three waves. Phase 1 (April 2026) covers those with qualifying income above £50,000. Phase 2 (April 2027) extends to qualifying income above £30,000. Phase 3, starting 6 April 2028, brings in everyone with qualifying income of £20,000 or more. That final threshold was confirmed by the government in the Spring Statement 2025 and represents the broadest expansion of MTD yet, pulling hundreds of thousands of additional sole traders and landlords into mandatory digital record-keeping and quarterly reporting.

If your combined gross self-employment and UK property income sits between £20,000 and £30,000, you have roughly two years to prepare. This article explains exactly what Phase 3 requires, who it affects, and the practical steps you should take now rather than waiting until 2028.

What Phase 3 means in practice

From 6 April 2028, MTD for Income Tax becomes mandatory for sole traders and landlords whose qualifying income is £20,000 or more. Unlike Phase 1 (above £50,000) and Phase 2 (above £30,000), the Phase 3 threshold uses “or more” rather than “above”. If your qualifying income is exactly £20,000, you are within scope.

Qualifying income means your combined gross income from self-employment and UK property. It is turnover, not profit. You do not subtract expenses, pension contributions, or the trading and property allowances before making the comparison. A landlord with £22,000 in gross rental income and £15,000 in allowable expenses has qualifying income of £22,000, not £7,000.

Once within MTD, you must:

• Keep digital records of all business income and expenses using MTD-compatible software
• Submit quarterly updates to HMRC summarising your income and expenses
• File a Final Declaration by 31 January following the end of the tax year

The quarterly deadlines follow the standard MTD calendar:

Who falls into the Phase 3 cohort

Phase 3 primarily affects sole traders and landlords earning between £20,000 and £30,000 in gross income. This includes a wide range of people:

• Part-time self-employed workers who also hold a salaried job
• Landlords with one or two buy-to-let properties generating moderate rental income
• Small-scale tradespeople: decorators, gardeners, mobile hairdressers
• Freelancers in the early stages of building their client base
• Retirees supplementing their pension with self-employment or rental income

Many in this bracket have relatively simple tax affairs and may currently use spreadsheets or paper records. The shift to digital record-keeping and quarterly submissions will be a larger operational change for this group than it was for the higher-income cohorts in Phases 1 and 2.

Those with qualifying income below £20,000 remain outside MTD for now. HMRC has stated that the position for this group is under review, but no mandatory start date has been set. They may still opt in voluntarily.

The Spring Statement 2025 confirmation

The £20,000 threshold was announced as part of the government’s revised MTD rollout timetable in the Spring Statement 2025. After years of delays and shifting goalposts, the three-phase plan now has firm dates for all thresholds above £20,000. This confirmation followed extensive consultation with professional bodies including the ICAEW, CIOT, and AAT, all of whom had pushed for a phased approach to give smaller businesses more preparation time.

The Spring Statement also confirmed that a soft-landing period will apply to the 2026/27 tax year for Phase 1 participants, meaning no penalty points will be issued for the first four late quarterly updates. Whether a similar soft-landing will apply to Phase 3 participants in 2028/29 has not yet been confirmed by HMRC, but it is widely expected. For full details on the MTD rollout, see the MTD for Income Tax guide.

Worked example: a landlord with £22,000 qualifying income

Nadia lives in Stockport and works part-time as a teaching assistant (employed, PAYE). She also owns a terraced house in Levenshulme that she rents out. Her gross rental income for 2027/28 is £22,000 per year (£1,833 per month). Her allowable expenses — mortgage interest relief (basic rate), insurance, maintenance, letting agent fees — total £8,400.

Step 1: Calculate qualifying income. Nadia has no self-employment income. Her qualifying income is her gross UK property income: £22,000. Her teaching assistant salary does not count because it is employment income, not self-employment or property income.

Step 2: Determine which phase applies. £22,000 is above £20,000, so Nadia falls into Phase 3. She must comply with MTD from 6 April 2028. She is not caught by Phase 1 (above £50,000) or Phase 2 (above £30,000).

Step 3: Choose compatible software. Nadia currently records her rental income and expenses in a notebook, with receipts in a shoebox. She needs to move to MTD-compatible software before April 2028. For a single rental property, a simple package will suffice. She reviews the software options and selects one that handles property income without unnecessary complexity.

Step 4: Set up digital records. Nadia begins recording her rental income and expenses digitally from April 2027, a full year before MTD becomes mandatory for her. This gives her four quarters of practice before the returns actually count.

Step 5: Submit quarterly updates from April 2028. Nadia’s first mandatory quarterly update covers 6 April to 5 July 2028, due by 7 August 2028. A typical quarter looks like this:

Her software submits these figures to HMRC digitally. She does not need to send receipts with each update, but she must keep the underlying records in case HMRC requests them.

Step 6: File the Final Declaration. After all four quarterly updates for 2028/29, Nadia files her Final Declaration by 31 January 2030. This confirms her full-year figures and includes any adjustments, reliefs, or claims not covered in the quarterly updates.

Why you should not wait until 2028

Two years feels like a long time, but there are strong reasons to start preparing now rather than in early 2028 when the deadline is imminent.

Software learning curve. Moving from paper records or basic spreadsheets to MTD-compatible software takes time. You need to understand how the software categorises income and expenses, how to reconcile bank transactions, and how submissions work. Starting early means you can learn at your own pace without the pressure of a looming deadline.

A year of practice. If you begin using compatible software from April 2027, you get a full year of quarterly record-keeping before it becomes mandatory. Mistakes during this practice year have no consequences. Mistakes in 2028/29 could result in penalty points.

Income fluctuations. Qualifying income is assessed annually. If your income is close to £20,000, it may cross the threshold in some years and fall below it in others. Having digital records already in place means you are ready regardless of which side of the line you fall on.

Cost planning. MTD-compatible software typically costs between £10 and £30 per month for sole traders and landlords with straightforward affairs. Factoring this into your budget now avoids a surprise expense in April 2028.

Voluntary sign-up before Phase 3

HMRC allows sole traders and landlords to sign up for MTD voluntarily before their mandatory start date. For someone in the Phase 3 bracket, voluntary sign-up from April 2026 or April 2027 offers several benefits:

• Familiarity with the system: You experience the full MTD cycle — quarterly updates and Final Declaration — with real data, in a live environment
• Earlier tax visibility: Quarterly reporting gives you a running estimate of your tax liability throughout the year, reducing surprises at year end
• Penalty-free practice: During voluntary participation, HMRC applies a lighter touch. You learn the rhythm of quarterly submissions without the risk of penalty points
• Smoother transition: By the time Phase 3 becomes mandatory, you will already have one or two years of MTD submissions behind you

To sign up voluntarily, you need a Government Gateway account, compatible software, and a self-employment or property business registered with HMRC. The sign-up process is handled through HMRC’s online services.

What if your income is close to the £20,000 boundary

The £20,000 threshold is based on qualifying income for the relevant tax year. If your gross income fluctuates around this level, you may be within MTD one year and outside it the next. HMRC has indicated that once you are within MTD, you remain within it unless your income drops and stays below the threshold. The exact mechanism for exiting MTD has not been fully detailed in guidance, but the expectation is that you continue filing quarterly until you can demonstrate you are consistently below the threshold.

For borderline cases, practical advice is straightforward: set up digital records and compatible software regardless. If your income is £18,000 one year and £21,000 the next, having MTD-ready systems in place means the transition in either direction is seamless. The cost of compatible software for a simple business is modest compared to the stress of scrambling to comply at short notice.

Penalties for non-compliance

MTD uses a points-based penalty system for late submissions. Each late quarterly update earns one penalty point. Once you accumulate four points, you receive a £200 penalty, and every subsequent late submission triggers another £200 fine. Points expire after a period of consistent compliance, but the system is designed to penalise persistent lateness rather than occasional slips.

Late payment of tax owed attracts separate penalties based on the amount outstanding and how long it remains unpaid. The Final Declaration deadline (31 January) carries the same late-filing and late-payment consequences as the current Self Assessment system.

For the 2026/27 tax year (Phase 1), HMRC has confirmed a soft-landing period where no points are issued for the first four late quarterly updates. Whether this will extend to Phase 3 participants in 2028/29 has not been confirmed. For full details on the penalty regime, see the penalties page.

Preparation checklist for Phase 3

If you expect your qualifying income to be £20,000 or more in 2028/29, work through these steps over the coming two years:

1. Confirm your qualifying income. Add your gross self-employment income and gross UK property income for the current tax year. If the total is £20,000 or more, Phase 3 applies to you.
2. Register for Self Assessment if you are not already registered. You cannot use MTD without a Self Assessment record.
3. Choose compatible software. Review HMRC’s list of recognised MTD-compatible products and select one that fits your business type and budget.
4. Start digital record-keeping from April 2027. Use the 2027/28 tax year as a practice year. Record all income and expenses digitally, even if you are not yet submitting quarterly.
5. Consider voluntary sign-up. If you want the full MTD experience before it becomes mandatory, sign up through HMRC’s online services.
6. Set calendar reminders for quarterly deadlines. Build the submission rhythm into your routine: 7 August, 7 November, 7 February, 7 May.
7. Speak to an accountant. If you are unsure whether you are within scope, or if you have multiple income sources that complicate the calculation, professional advice now saves problems later.

Frequently asked questions

Is the Phase 3 threshold “above £20,000” or “£20,000 or more”?

Phase 3 applies to qualifying income of £20,000 or more. This differs from Phase 1 (above £50,000) and Phase 2 (above £30,000). If your qualifying income is exactly £20,000, you are within scope from April 2028.

Does my employment income count towards the £20,000 threshold?

No. Qualifying income for MTD is limited to gross self-employment income and gross UK property income. Salary, pension income, dividends, and savings interest do not count.

What if my income is below £20,000 — will MTD ever apply to me?

HMRC has stated that the position for those with qualifying income below £20,000 is under review. No mandatory start date has been set for this group. You can sign up voluntarily if you choose.

Will there be a soft-landing period for Phase 3?

HMRC has confirmed a soft-landing for Phase 1 (2026/27) where no penalty points are issued for the first four late quarterly updates. Whether a similar concession will apply to Phase 3 in 2028/29 has not yet been confirmed, but professional bodies widely expect it.

Can I use a spreadsheet instead of software?

Only if the spreadsheet is linked to HMRC systems through MTD-compatible bridging software. A standalone Excel file does not meet the requirements. Most people in the Phase 3 bracket will find dedicated MTD software simpler and more cost-effective than a bridging solution.

Sources

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