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An unhappy new tax year beckons on April 6. In six weeks’ time, nearly 1mn freelancers and buy-to-let landlords will become guinea pigs in the government’s Making Tax Digital experiment.
Dubbed the biggest tax shake-up in a generation, it will involve filing five online returns a year instead of one last-minute bout of panicked spreadsheet, bank statement and tatty receipt juggling in late January.
I’m not saying that the old-fashioned way of filing your taxes is particularly enjoyable. But the biggest problem with the new way? Most people don’t know it’s coming — or how much it could cost them. And while the authorities are banking that it will boost the amount of tax collected, given the level of upheaval, it’s entirely possible it could be bad news for the wider economy.
From April, those generating over £50,000 a year in revenue (not profit) from self-employment or property rental must register for Making Tax Digital and submit quarterly returns of their income and expenses. Come January, they must pull these together into one final submission (and payment).
However, a survey by IPSE, an association for the self-employed, suggests some 70 per cent of sole traders have not heard of the initiative or don’t know what it entails. In my experience, those who have found out are aghast at how much extra time and expense it is going to cost them.
This does not mean they are anti-digital — far from it. Most people have been happily banking and filing their tax returns online for years. But the rub with Making Tax Difficult (sorry, Digital) is that it requires using third-party accounting software that has been approved by HM Revenue & Customs.
Even if you’re not self-employed, you may have noticed more adverts for QuickBooks, Sage and other subscription-based accounting software popping up. HMRC’s digital shift is certainly going to be good for their businesses — but what about the small traders forced to shell out hundreds for their services?
Digital banks have also capitalised on the opportunity, offering free HMRC-compliant software with their sole trader accounts. Starling Bank says new account openings are up 50 per cent in 2026 compared with a year ago. But banks are not charities. An array of fees apply for different services and few pay interest on cash deposits.
Like many odd quirks of the British tax system, we can blame former Conservative chancellor George Osborne for coming up with this ruse. But in the decade or so it’s taken to actually make tax digital, why couldn’t the authorities roll out their own free software for those with simple affairs?
Self-employed people say it adds to the raw financial deal they already face, with two out of three not saving into a pension, and many finding it harder and more expensive to get a mortgage.
But they shouldn’t expect much sympathy from HMRC, which claims small businesses account for 60 per cent of the UK’s £47bn tax gap. The self-employed and small partnerships make up an estimated £5.8bn chunk of this, though HMRC reckons errors and failure to take reasonable care with tax records account for more of the losses than deliberate tax evasion.
Will filing returns earlier and more frequently reduce this gap — or will it risk pushing the tech-adverse into the black economy or early retirement?
Playing devil’s advocate, you could argue that separating one’s personal and business finances and filing returns in stages could reduce the chances of a costly annual “tax shock”. A million people failed to file their tax returns on time this January and received a £100 fine. More than 800,000 people have Time to Pay agreements with HMRC and are charged nearly 8 per cent interest to pay off their arrears in instalments.
The new system involves a complex points system and £200 penalties, though HMRC says these will be applied with a light touch in the first year of operation. But over the next two years, 2mn more landlords and sole traders will be caught in the net as the income threshold gradually drops to £20,000 — a figure that is surely far too low.
“Like other areas of the UK tax system, we have to assume these limits will not rise with inflation, so many more people could be caught out in coming years,” says Robert Salter, director at Blick Rothenberg. “A small tradesperson turning over £20,000 a year may well have profits below the income tax threshold of £12,570, so there’d be no tax to pay anyway.”
Five tax returns to prove you owe no tax? Where’s the Office of Tax Simplification when you need it? Ah yes, it was abolished in 2023. The old HMRC advertising slogan used to be: “Tax doesn’t have to be taxing.” These days, it most definitely is.
Claer Barrett is the FT’s consumer editor; claer.barrett@ft.com Instagram @ClaerB