Self-employed set for £2bn bill as HMRC’s Making Tax Digital scheme lands

Sole traders and landlords anticipate a £2billion bill to keep up with HMRC’s new digital scheme amid a ‘mounting compliance crisis’, according to a leading business bank. 

The tax office’s Making Tax Digital (MTD) scheme, which requires the self-employed to file quarterly updates, will cost the self-employed billions, according to research by business management platform Tide.

It warns there is a ‘mounting compliance crisis’ as it estimates MTD will cost those eligible an estimated £2.18billion, or £753 per business, under the new rules.

MTD will require sole traders earning over £50,000 from this April to move from a single annual tax submission to five filings per year. The threshold will fall to £30,000 from April 2027 and £20,000 from 2028.

Tide’s research shared with This Is Money found that sole traders expect to spend 114 additional hours researching the rules in their first year, with one in seven saying they will reduce billable hours to cope with the additional work.

At the same time, sole traders expect to spend an average of £753 to remain compliant.

George Schmidt, chief executive of Tide UK/Europe said: ‘With an eyewatering £2 billion in compliance costs and over 40 million working days being wasted on paperwork, the UK’s sole traders are facing a compliance crisis. Every minute spent wrestling with compliance is a minute taken away from growing their business.

The tax office announced plans for Making Tax Digital (MTD) in 2016 but has faced numerous delays over the years.

Since 2019, MTD for VAT has been mandatory for all VAT-registered businesses, above the £85,000 threshold and those that have voluntarily registered.

These businesses need to keep digital records of all business transactions and submit statements quarterly using approved software, but it has come under fierce criticism for adding even more of a burden onto the self-employed. 

An HMRC spokesperson said: ‘We’ve worked extensively with customers, their representatives and software developers to ensure Making Tax Digital works for small businesses and landlords – and that there are a range of free and low‑cost software products available, alongside a wider range of paid options.

‘Customers can identify which software is right for them using our online tool on GOV.UK. MTD will give them a more real-time overview of their finances, freeing up time to grow their business.’

Accountants warn that ignoring the rule change will also come with costly penalties from 6 April. Two late filings will see those affected face a £200 fine, according to Blick Rothenberg, which HMRC says only affects MTD volunteers. 

And no penalties will be awarded for the late filing of quarterly updates in the 2026/27 tax year. 

Penalties are changing from April 2026 for individuals mandated to use Making Tax Digital for Income Tax. 

These relate to the late submission of quarterly updates and tax returns, and the late payment of Income Tax Self Assessment liabilities. 

For tax years prior to an individual joining Making Tax Digital, the existing penalty rules will continue to apply. 

Heather Powell, a partner at the firm, added: ‘Accountants and tax advisors are already speculating that this filing regime will be followed by a quarterly tax payment regime, mirroring the VAT regime. 

‘It is easy to see why The Treasury would be happy to see income tax payable by landlords paid at an earlier date than current legislation requires.

She added: ‘Making tax digital is being imposed on all but the smallest landlords. Agents have been reporting over the last year a significant increase in landlords selling their properties, and this tax change is not going to encourage any to stay in the market – further reducing the properties available for people to rent.’

Providers scramble to offer free MTD tools 

The MTD change has prompted providers to offer their own tax filing systems to help the transition. 

There is existing software that creates digital records or plugs into your ongoing spreadsheets. 

HMRC says the right type of software will support all income sources covered by MTD, including property and foreign property. It will also need to let you make submissions to HMRC and work with your accounting period.  

Tide, among other banks, have launched its own free tool to allow customers to file MTD returns within the app. 

Monzo is also offering a new free built-in tax tool, powered by Sage, while Starling Bank also offers something similar for its customers. 

Tide also offers its customers three free invoices, alongside other tools within paid tiers.  

> Read our tax expert Heather Rogers’ tax guide for accidental landlords.