MTD for Income Tax Exemptions: Who Is Excluded and How to Apply

Not everyone who files a Self Assessment return will be pulled into Making Tax Digital for Income Tax. Two separate routes sit outside the regime: automatic exemptions, which HMRC applies from the information it already holds, and the digital exclusion exemption, which a taxpayer has to apply for. The distinction matters, because an automatic exemption needs no action while a digital exclusion exemption requires a live application and, until it is granted, the obligation to file quarterly still stands.

Whether MTD applies at all is decided first by the qualifying income test, and only then by any exemption. The threshold mechanics, and the way sole-trade and property income combine to reach it, sit within the wider MTD roadmap for owner-managed SMEs. This spoke deals with the population that falls outside the regime even where the income arithmetic would otherwise bring them in.

Automatic exemptions

Some taxpayers are outside MTD for Income Tax without doing anything, because HMRC can identify them from the data it holds. The clearest case is the income floor: anyone whose qualifying income is £20,000 or less is automatically outside the regime. Below that level there is no quarterly filing obligation and the ordinary Self Assessment return continues as before.

• Qualifying income of £20,000 or less.
• Individuals without a National Insurance number.
• Lloyd's members reporting underwriting business on the SA103L page.
• Those who told HMRC on the 2024 to 2025 return that they cannot provide information for reasons of physical or mental capability.
• Certain categories such as ministers of religion and some allowance recipients, for a defined period.

The government guidance on how to find out if you can get an exemption from MTD for Income Tax sets out the automatic categories and the dates that attach to the time-limited ones. Because these are applied by HMRC rather than claimed, the practical step for an owner-manager is to check that the return data HMRC holds actually reflects the position, particularly the qualifying income figure.

Digital exclusion: the grounds

The digital exclusion exemption is for people for whom it is not reasonable to use compatible software. It is a genuine practical-barrier test, not a preference test. HMRC accepts three broad grounds.

1. Age, a health condition or a disability that stops you using a computer, tablet or smartphone to keep digital records or send them to HMRC.
2. Being a practising member of a religious society or order whose beliefs are incompatible with using digital communications or keeping digital records.
3. Location: you cannot get internet access at your home or business and there is no reasonable alternative available to you.

The line HMRC draws is between a real barrier and an inconvenience. Applications are refused where the only reason offered is that the taxpayer has always filed on paper, is unfamiliar with software, keeps very few records, or simply faces extra time or cost to sign up. None of those, on their own, makes digital filing unreasonable in HMRC's view.

How to apply

A digital exclusion exemption is claimed by contacting HMRC directly, either by phone or in writing, using the Self Assessment general enquiry contact details. A written application should carry the title Making Tax Digital for Income Tax digitally excluded application so it is routed correctly. An application can be made by the taxpayer or by a friend or family member acting for them, which matters where the very barrier being claimed is one that makes digital contact hard.

The application should set out which ground applies and why it makes compatible software unreasonable in the individual's circumstances, rather than simply asserting the category. HMRC reviews each case on its facts, and until an exemption is granted the taxpayer remains within MTD and must keep to the quarterly deadlines. Leaving the application to the last minute risks a live filing obligation running while the decision is pending.

Being exempt does not remove the reporting duty

An exemption from MTD for Income Tax is an exemption from the digital method, not from tax reporting. A taxpayer who is automatically exempt or who is granted a digital exclusion exemption still has to report income and gains through an ordinary Self Assessment return in the normal way. The obligation to declare and pay is unchanged; only the mechanism, quarterly digital updates versus a single annual return, differs.

For an owner-managed business this means an exemption is rarely a reason to relax the bookkeeping. Clean records still feed the annual return, still support any VAT or corporation tax position, and still make the year-end straightforward, which is why an exempt sole trader often keeps cloud bookkeeping in place anyway.

Should you rely on an exemption?

For most owner-managers an exemption is a narrow escape hatch rather than a strategy. The £20,000 floor takes the smallest businesses out of scope, and the digital exclusion grounds are drawn tightly around genuine barriers. A business that is growing towards the threshold, or that already keeps records in a spreadsheet and faces a move to cloud accounting before long, is usually better served preparing for the regime than trying to stay outside it. The Association of Taxation Technicians' review of the exemption cases is a useful cross-check on where the boundaries actually fall.

Where an exemption genuinely applies it should be secured properly and evidenced, and where it does not, the effort is better spent on a clean transition. Either way the decision belongs alongside the rest of the owner-managed MTD planning, not treated as a way to avoid the question.