Your Brand
mtd & the three-year lock-in what taxpayers need to know
#HMRC#Making Tax Digital#MTD for Income Tax
Blog

MTD & the Three-Year Lock-In: What Taxpayers Need to Know

With the first phase of Making Tax Digital (MTD) for Income Tax Self-Assessment set to begin in April 2026, one of the …

R
RentalBux
October 30, 2025

With the first phase of Making Tax Digital (MTD) for Income Tax Self-Assessment set to begin in April 2026, one of the key parts to pay attention to is figuring out which taxpayers must join and when, especially with the three-year lock-in rule being in place. However, as MTD moves closer to becoming the norm, new questions are emerging: What happens if circumstances change? Can taxpayers leave MTD early if they no longer meet the income criteria or cease trading altogether?

New insights from HMRC provides further details and clarity on exemption criteria, exit rules and transitional scenarios under MTD. The updated guidance will help in explaining the condition under which taxpayers can leave MTD or apply for relief.

What is the MTD Three-Year Lock-In period?

Once a taxpayer enters MTD, they are required to remain under the rules of MTD for three consecutive tax years, even if their qualifying income subsequently falls below the MTD threshold. This is referred to as the “Three-year lock-in” rule. This is majorly intended to avoid short-term fluctuations triggering constant entry and exit from the system. The rule ensures stability and reduces administrative burden caused by income levels briefly crossing the threshold.

The three-year lock-in applies to those whose income drops after they have joined MTD, regardless of whether they are actively trading or letting out property. Only after three full years below the threshold can they formally exit MTD.

What Happens if Trading or Rental Income Ceases?

Taxpayers who stop all qualifying income sources altogether; for example, a landlord selling their portfolio or a sole trader retiring are not bound by the three-year lock-in. In these cases, they are required to submit one final quarterly update covering activity up to the cessation date, then notify HMRC accordingly.

However, even minimal ongoing qualifying income such as low-level rental income will trigger the full three-year lock in, despite a significant reduction in overall earnings.

What if Circumstances Change Before the MTD Start Date?

MTD entry is based on qualifying income from the previous tax year, creating a one-year lag. For instance, those with income over £500,000 in 2024/25 will be required to comply from April 2026. But if circumstances change significantly before the mandating date. For example, someone ceases their business; HMRC has indicated they will not need to join MTD as long as all sources of qualifying income have ended before the start date.

However, partial changes would not exempt them. A taxpayer who reduces their sole trade income but continues to earn some self-employment or rental income would still need to comply with the three-year lock-in rule if the earlier year’s income exceeded the threshold.

Who Can Apply for an MTD Exemption?

Taxpayers will be able to apply for an exemption from taking part in MTD for Income Tax for the following reasons:

  • If it is not possible to use software to keep digital records or submit them; this may be due to age, disability or location etc
  • If they are a practising member of a religious society (or order) whose beliefs are incompatible with using electronic communications or keeping electronic records

HMRC requires you to explain how these reasons apply to your own circumstances. HMRC will review the information provided and will contact taxpayers to let them know whether they have qualified for exemption.

Conclusion

As MTD becomes a permanent feature of the UK tax system, understanding who can leave, who must stay, and who might avoid joining is essential. While the three-year lock-in locks taxpayers into MTD for three years, there are exceptions, especially for those ceasing to trade or facing genuine digital exclusion. As further guidance emerges, advisers and taxpayers alike should keep up to date to ensure informed decisions and full compliance.

Tags

#HMRC#Making Tax Digital#MTD for Income Tax