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- 23 Apr 2024
Rising costs: Making Tax Digital set to place extra pressure on self-employed
- 29 Feb 2024
HMRC has confirmed that Self Assessment taxpayers will need to have registered for Making Tax Digital for Self Assessment (MTD for ITSA) by April 2026 or April 2027, depending on their income. But they also acknowledged that taxpayers would incur an additional, ongoing cost as a result.
With the cost of doing business on an upward trajectory, IPSE is pushing government to ease the burden elsewhere. In this blog, we look at what it all means for the self-employed.
What’s happening with Making Tax Digital?
From April 2026, anyone with a ‘qualifying’ self-employed income of more than £50,000 will be required to register for MTD for ITSA.
If your self-employed income is between £30,000 and £50,000, the requirement will apply to you from April 2027 – so you’ll have an extra year to prepare.
This wasn’t always the case. For years after going public with its plans for a digital tax system in 2015, HMRC were resolved to including anyone with a self-employed income of £10,000 or more in the scheme. This was despite warnings from IPSE, accountancy sector representatives and others that this would be prohibitively burdensome for people earning small self-employed incomes.
But an update published by the Treasury in December 2022 outlined a new timetable for the MTD programme – quietly dropping any mention of the £10,000 threshold.
The higher thresholds are fair on established freelancers and good news for side hustlers and low income sole traders. But other requirements, such as submitting quarterly tax reports to HMRC, are still set to be features of the digital tax system.
IPSE continues to call for a rethink on quarterly reporting, which is likely one of the biggest drivers behind the cost those required to use MTD are forecast to pay.
How much will Making Tax Digital cost?
HMRC’s own estimates for how much the shift to MTD will cost users varies based on income, but lower earners are predicted to pay most in the short-term:
Over £50,000 group – April 2026
- Average transitional cost of £285
- Average annual additional cost of £115
£30,000 to £50,000 group – April 2027
- Average one-off ‘transitional cost’ of £350
- Average annual additional cost of £110
These costs represent the money users will likely spend on subscriptions to HMRC-approved software and additional accountancy fees, but also the opportunity cost of time spent learning how to operate new systems and filing quarterly reports.
For its part, HMRC estimates that it will collect an additional £780 million in revenue through more accurate tax reporting, submissions and compliance.
In return, taxpayers will almost certainly be hoping that this extra revenue will lead to a better customer service experience, which MPs said was at an “all-time low” this week.
Will there be free software for MTD?
In its most recent policy paper on MTD, HMRC reiterated a commitment to ensuring that free versions of approved software for MTD will be available. But this comes with the caveat that it will be for “the smallest businesses with straightforward affairs”.
There’s also a vague promise to ensure “affordable” software products are available for businesses that need to update their accounting systems for MTD.
At this stage, we still don’t know what the capabilities of free or ‘affordable’ software will be, or whether it will be useful for anything other than the most simplistic arrangements. And from the software developers’ perspective, it’s difficult to see the commercial case for giving much functionality away for free.
Ultimately, the self-employed should take government’s pledge to guarantee free or cheap software for MTD with a pinch of salt. Instead, they might consider getting a head start on identifying what it is they will need from software to help make product selection easier when the time comes.
Will Making Tax Digital help the self-employed?
Delayed for years and costing more than expected, MTD looked like the Taxman’s answer to HS2 at one point in time, but progress is seemingly being made. But IPSE continues to push for changes that will make life easier for the self-employed – like quarterly reporting, which only stands to make life easier for number crunchers in the Treasury.
Nonetheless, it would be wrong to suggest that some tweaks to MTD will make the impact that the self-employed really need. With the tax burden on track to be at its highest in decades, MTD will only add to the cost of being in business for the self-employed, who increasingly feel like targets for tax rises despite otherwise being overlooked in public policymaking.
With the Chancellor preparing to deliver this government’s final Budget before an anticipated election, IPSE has urged No.11 to change the record and embrace the entrepreneurial spirit of the self-employed with a bold package of positive, pro-growth policies.
Pro-growth policies for the self-employed
We’ve called for a long-overdue increase of two key growth ceilings in the tax system – the Trading Allowance and the VAT registration threshold – which have both been frozen for seven years and discourage side hustlers and established freelancers alike from pursuing opportunities.
We’ve also reiterated calls for a rethink on the IR35 and off-payroll working rules which, to quote the influential Public Accounts Committee of MPs, is “deterring legitimate economic activity”. The same could be said, in our view, of the approach to enforcing Managed Service Company legislation, which threatens to be an equally pernicious threat to freelancers and contractors.
Finally, we’ve backed calls by savings and investment provider Hargreaves Lansdown to revamp the Lifetime ISA to better serve the self-employed, with higher age limits and penalty-free withdrawals.
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