August 6, 2025
By Merranti

What Happens If Your Income Falls or You Sell a Property Before MTD Starts?

As the Making Tax Digital for Income Tax Self Assessment (MTD ITSA) deadline draws nearer, many self-employed individuals and landlords are asking:

“What if my income drops below the threshold before MTD starts?”
“What if I sell my property before April 2026 — do I still have to join?”

These are crucial questions — because HMRC doesn’t assess your current income to decide if you’re in MTD ITSA. They look at your income from two tax years earlier.

In this blog, we’ll explain how falling income and property disposals affect your MTD status, what HMRC’s three-year rule means, and how Merranti Accounting can guide you through the maze.

The Key Rule: Income Two Years Earlier Determines MTD Entry

MTD ITSA will apply from 6 April 2026 for individuals with qualifying income (from self-employment and/or property) over £50,000.

But eligibility is based on your income in the 2024/25 tax year — even if your income drops afterwards.

Example:

2024/25 income: £53,000 (freelance + rental)
2025/26 income: £28,000 (sold rental property)
2026/27 income: £22,000 (semi-retired)

You will still be required to comply with MTD ITSA from April 2026, even though your income has since fallen.

What If You Sell Your Rental Property?

Selling a property in 2025 or early 2026 does not remove you from MTD if your 2024/25 income was above the threshold.

HMRC doesn’t make the rules based on your current circumstances — they use your income from two years ago.

Even if you have zero rental income in 2026, you may still be mandated into the MTD system.

What Counts as Qualifying Income?

Only gross income from:

Self-employment
UK property
Overseas property

Income from employment, pensions, dividends, and savings do not count toward the £50k threshold.

Can I Exit MTD If My Income Drops?

Yes — but only after three consecutive years where your qualifying income falls below the threshold.

The Three-Year Rule:

To exit MTD, you must:

File tax returns showing income under the threshold for three years in a row
Then notify HMRC that you no longer meet the criteria

So if your income drops in:

2026/27 → You can exit after 2029/30

Until then, you must remain in the MTD regime and submit quarterly updates and a final declaration, even if you have minimal or no qualifying income.

Common Scenarios Explained

Scenario 1: Business Income Falls

2024/25: £56,000
2025/26: £42,000
2026/27: £35,000

➡️ Still in MTD until you complete three full low-income years, and then apply to opt out.

Scenario 2: Property Sold

2024/25: £28,000 (self-employed) + £26,000 (property)
2025/26: Property sold, total income = £30,000
2026/27: £29,000 from freelance work

➡️ Still mandated into MTD from April 2026 due to 2024/25 income = £54,000.
Can apply to exit after 2029/30 if income remains below £50k for three years.

Scenario 3: Early Retirement or Illness

2024/25: £62,000
2025/26: £35,000 (partial work)
2026/27: £15,000 (small pension)

➡️ Still need to comply with MTD from April 2026
Can apply to leave MTD after 2029/30

How Merranti Can Help

We understand that life changes — income isn’t always stable, and your business or property situation can shift year to year. That’s why Merranti offers adaptive, personalised MTD support.

Here’s how we help:

1. Annual Income Monitoring

We’ll monitor your qualifying income every year and track when you become eligible or eligible to exit.

2. HMRC Notification Support

When the time comes to opt out of MTD, we’ll handle the process and ensure all criteria are met — so you’re not stuck in the system longer than needed.

3. Simplified Quarterly Filing

Even if your income is now minimal, we’ll ensure your quarterly updates and year-end filings are accurate, fast, and stress-free.

4. Digital Record Automation

Using Xero, Hubdoc, and our in-house AI assistant Martin, we’ll automate your record-keeping to reduce the burden of MTD compliance — especially when income is low.

What If I Disagree With HMRC’s MTD Assessment?

If HMRC sends you a notice to join MTD ITSA but you believe your income is under the threshold (e.g. due to an incorrect return), you should:

Review your 2024/25 tax return for errors or outdated info
Amend the return if needed
Contact HMRC or let Merranti do this on your behalf

In some cases, individuals are mistakenly included based on combined income types (e.g. employment + rental). Merranti will review and appeal if necessary.

Tip: Don’t Deregister Prematurely

Some people assume they can avoid MTD by selling a property now or closing their business. That may not work if your income two years ago was high.

Instead, speak with an advisor to understand your exit timeline and ensure your actions are tax-efficient.

Summary: What You Need to Know

MTD ITSA eligibility is based on income from two years earlier
Selling property or cutting business income does not immediately exempt you
You must remain in MTD until you have three consecutive years below the threshold
You can then apply to leave the MTD system
Merranti Accounting will help you track, report, and exit correctly

Final Thought

MTD ITSA isn’t just a one-time switch — it’s an ongoing system that requires planning, review, and digital discipline. Even if your income falls or your property journey ends, your MTD journey may continue.

Let Merranti guide you through it with clear advice, practical tools, and a proactive support team.

📞 Speak to an MTD specialist today