Huge tax shake-up that could force you to file returns NINE times a year – or face big new fines

Hundreds of thousands of taxpayers are just seven weeks away from a major tax shake-up that could plunge their finances into chaos – and leave them facing hefty fines.

This spring, HM Revenue & Customs is dramatically changing the way that property owners, the self-employed and sole traders report their income and expenses, under a reform called Making Tax Digital for Income Tax.

Over the next two years almost three million people will be affected. But tax experts warn the overhaul is ‘little understood’ and many are ‘blissfully unaware’ of the upcoming changes, which have been repeatedly delayed for more than a decade since George Osborne, the then-Chancellor, announced them in 2015.

Soon, two million people could be forced to file taxes up to ten times a year if they are registered for value added tax (VAT).

Taxpayers will have to choose between a confusing list of external software providers, some of which charge as much as £35 a month, to upload their income and expenses each quarter.

And anyone who fails to keep up with the new rules will be punished through a new penalty points system and face fines.

So, what exactly is changing, who will be affected and how will the new system work?

What is changing?

The way that millions of people file their taxes is changing, as they will have to start reporting their earnings at least five times throughout the year instead of once a year.

Making Tax Digital is widely seen as the single biggest reform to taxation since self-assessment was introduced in 1997. There are fears the new rules could cause widespread confusion.

Under the new rules, you will need to keep digital records of your income and expenses, which you then submit to HMRC every three months.

To do this, you must use government-approved software run by a third-party company to manage your tax affairs and submit updates to HMRC every quarter.

HMRC claims the system is designed to improve accuracy, reduce errors and save time. But entrepreneurs warn it will actually increase the amount of time workers have to spend filing their taxes.

Taryn Lee Johnston, who runs Lincoln-based publishing company The FCM Group, says it feels like yet another hit for small businesses.

She adds: ‘For many self-employed people and small business owners, this feels like yet another administrative weight added to an already heavy load. The concern is not just frequency, but cost, time and mental bandwidth. Many small business owners do not have in-house finance teams. 

‘They will either need to pay accountants more or spend more hours on compliance rather than growing their businesses. At a time when the UK says it wants to encourage entrepreneurship and economic growth, increasing administrative burden sends a conflicting message.’

Who will be affected by Making Tax Digital?

From April 6, an estimated 864,000 people will be caught up in the reforms and expected to change the way they report their taxes.

It will affect a huge range of people – from electricians and plumbers, to landlords, personal trainers, photographers, hairdressers and consultants.

Elsa Littlewood, of tax firm BDO, says: ‘Many landlords and the self-employed may be blissfully unaware that they are in scope for Making Tax Digital and will need to act now to comply with the new rules. This is a big change for taxpayers, and the transition is likely to be difficult for some.’

If you already submit a self-assessment tax return each year and you receive income from either self-employment or property, then this could well impact you.

Whether you need to use the Making Tax Digital system to make submissions every three months will depend on your income.

From April this year, anyone earning more than £50,000 from self-employed work or in property income will have to abide by the new rules.

In the second phase of the roll-out, a further 1,077,000 people will be subjected to the reforms. From April 2027, it will apply to anyone earning more than £30,000 from self-employed work or property and from 2028, anyone earning above £20,000 will be affected – an estimated additional 975,000 people. It is expected that in two years, almost three million could be caught in the net of the new system.

The income threshold is based on gross income, not profits – which means even those making modest earnings after expenses could still be caught by the new rules.

The Government has set out plans to introduce legislation to lower the qualifying income threshold in the future so it may be that anyone earning income as a sole trader or earning rent as a landlord will need to use the Making Tax Digital system in future, no matter how little they make.

HMRC says that partnerships will also need to use the system for income tax in the future but that it will set out the timeline for this at a later date.

It’s important to note that this won’t apply to limited companies. Those accounts will continue to be filed through Companies House.

How do you figure out what income band you’re in?

Whether you need to comply this year will depend on what you made in the 2024/25 tax year. It’s important to remember that you are taxed on turnover, not profit.

If you earned more than £50,000 during that tax year as a sole trader or from rental income, then you’ll need to start keeping digital records from this April.

If your income was below £50,000 in the 2024/25 tax year, then you’ll need to next work out what your income is on track to be during the 2025/26 tax year. If it’s over £30,000, then you’ll need to start from April 2027.

Those earning under £30,000 in the 2025/26 tax year will then need to check their 2026/27 tax return. If they earn more than £20,000, they will need to start in April 2028.

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Will you have to declare savings interest or dividends?

No, income from savings interest or dividends paid from stocks and shares, or any income taken from pensions, for example, won’t be included in the rollout.

You only need to create digital records of your self-employment and property income and expenses.

Will you pay tax every three months?

No, these quarterly updates are not tax returns, which means you do not have to make any tax payments.

They are just summaries of how your business is doing based on your up-to-date records. HMRC advises you to update your records online as you go to make the quarterly updates as seamless as possible.

The first filing will be due on August 7 for any income and expenses earned between April 6 and July 5.

The next filing date will be November 7, then February 7, May 7 and so on.

HMRC says you will be able to see an estimate of your tax bill after sending each update.

You must complete a final tax return (instead of the old self-assessment) by January 31 following the end of the tax year.

> This is Money Newsletter: What you need to know direct to your inbox 

What if you miss a submission deadline?

There will be a new penalty-points system that punishes late filers, similar to how penalty points work on a driving licence.

This penalty regime won’t start this year but will apply from April 2027, according to Heather Powell, partner at tax advisory firm Blick Rothenberg.

You will get one point for every late filing – be it a quarterly filing or the year end ‘final’ filing.

If you get four penalty points, you will be hit with a £200 fine. Then, once you have four points on your record, you are fined £200 for every additional late submission.

Powell says you can ‘reset’ your points by ensuring that all your submissions in the next 12-month period are submitted on time and all submissions due from the previous 24 months have been filed.

There are also penalties for late payment of tax, which must be done by January 31 each year. Under the new regime if tax is paid more than 15 days late, the penalty is 3pc of the outstanding tax payable. If the tax is not paid within 30 days of the due date, a further penalty of 3pc of the tax due will be charged.

If still outstanding after 30 days, a further penalty is charged at a rate of 10pc per year for every day tax is unpaid.

These late-payment penalties only apply to tax payments at the end of the year that have not been made on time, not to ‘payments on account’, which are paid throughout the year ahead of time based on an estimate of how much tax you owe.

What kind of software should you use and is it free?

You will need to use software that works with Making Tax Digital. But HMRC does not offer its own, so the burden for finding it and setting it up is on taxpayers.

The software will allow you to create, store and correct digital records of your self-employment and property income and expenses as well as send your quarterly updates.

There are two types of software you can use. ‘Bridging software’ picks up the financial information from an Excel spreadsheet. You can manually input details of your transactions in this spreadsheet once a quarter.

This might be right for you if you want to keep using your current spreadsheet.

The other type is ‘compliant software’, which allows you to create digital records of your self-employment or property transactions as they occur. You can either link it to your business bank account to import transactions automatically as they happen, scan receipts and invoices, or manually enter your income and expenses.

To find the right provider for you, HMRC has created a software finder tool at gov.uk/guidance/find-software-that-works-with-making-tax-digital-for-income-tax

The tool offers a dizzying array of options. For example, a sole trader who has to declare pension contributions and interest earned on savings is presented with a list of 41 options, many of which have unusual names such as !Coconut or #GoFile.

Many providers do charge a fee, often between £5 and £15 per month – but others with all the bells and whistles charge up to £35 a month. However, there are also some fee-free options, or free trials.

What you need to do to be ready

If you don’t already have one, it would be worth setting up a separate bank account for your self-employed or property income and expenses.

You’ll then need to set up accounting software to allow you to upload copies of rent demands, purchase invoices and other business related activity.

Make a note of filing deadlines and factor in the time required for all this admin to make sure you don’t miss any.

Anyone who runs their property income or sole trader income through their personal bank accounts, and collates everything at the end of each tax year, now only has six weeks to get their accounting records in order.

Accountancy firm Blick Rothenberg says the key tasks for these people would be opening a separate bank account and appointing an accountant to write up their accounting records or getting accounting software that HMRC has designated as ‘compliant’ for filing the quarterly returns.

What you can do to work around it

The good news is that you can include the cost of the digital software in your quarterly updates and offset it against your income as a business expense.

When it comes to the updates you send through each quarter, the information you record doesn’t have to be completely accurate as you can correct it later on.

For example, you can make adjustments and add payments to your records later on when you file your final return to HMRC at the end of the tax year.

You can also apply for an exemption if you think you’re ‘digitally excluded’. This may apply to you if it is ‘not reasonable’ for you to use the software to keep digital records or submit them.

There are various reasons why this might apply to you, including your age, a disability, a health condition or if your location stops you from using a computer, tablet or smartphone.

You may also be digitally excluded if you’re a practising member of a religious society or order, whose beliefs are incompatible with using digital communications or keeping digital records.

Are you worried about Making Tax Digital? Email us at moneymail@dailymail.co.uk