HMRC’s new rules are stressing freelancers out – here’s what you need to know
Want to strike fear and panic into the heart of any freelancer? Just whisper the words “self assessment tax return” and then watch their fight or flight mode activate in real time.
Even if you have been happily self-employed for decades, the chances are pretty high that whenever tax return season rolls around each year, you’ll start to seriously question your life choices. Sure, you don’t have a boss and the office politics are non-existent, but wouldn’t you take a bit of inter-colleague passive aggression if it meant you never had to deal with HMRC’s online webchat again? And which cruel soul decided that the deadline had to fall in January, when you’re already feeling skint and sorry for yourself?
From next spring, though, the decades-old self-assessment process is about to undergo a shake-up. As a result, freelancers will have a new set of simultaneously boring but mildly terrifying buzzwords to get het up over – and those words are “making tax digital”.
After teasing the rollout for longer than the interminable promotional cycle of the last James Bond movie, HMRC will be introducing this new initiative for reporting income from self-employment from April 2026. And not everyone is particularly thrilled about this development. Ask the freelancers in your life about their thoughts on “making tax digital”, and they’ll likely embark on a stressed-out rant or simply look at you blankly. Earlier this year, a report from software company IRIS found that 31 per cent of sole traders (that’s someone who owns and runs their own business) had never even heard of it.
So what does the new scheme involve? Adam Owens, head of tax advisory at accountancy and business advisory firm Xeinadin, explains that if you have a qualifying income of more than £50,000 from “self-employment, an unincorporated business or being a landlord”, you’ll need to submit records of your income and expenses to HMRC quarterly. And you’ll still have to send in a final declaration on the usual 31 January deadline on top of this, too. So that’s a lot more time spent trying to remember your Government Gateway number. Don’t all cheer at once. And, Owens adds, you’ll also have to “use suitable software from an accounting and records keeping perspective”.
That trusty old Excel spreadsheet that you’ve dredged out every January for the past however many years? It’s no longer going to cut it – you’ll need to use a digital platform that’s recognised by the tax office. “HMRC expects businesses to use approved software that links directly to their systems,” says Matt Croker, director at investment firm Heligan Group. “Spreadsheets alone aren’t enough any more. If you still want to use them, you’ll need extra ‘bridging software’ to make them compliant, which adds complexity and cost.”
In 2027, these changes will apply to those earning more than £30,000 annually; the following year, people earning over £20,000 will be affected too. It’s estimated by the government that around 780,000 people will be impacted in the first year of the rollout, with this number rising to 970,000 from April 2027.
What’s the reason behind the shift? Craig Ogilvie, HMRC’s director of Making Tax Digital, says that the change will “make it easier for self-employed people and landlords to stay on top of their tax affairs and help ensure they pay the right amount of tax”; meanwhile MP James Murray, the exchequer secretary to the Treasury, has described it as a “modernising” initiative” that will help businesses “work more efficiently and productively”. But, you cry, isn’t it their job to say precisely that?
In theory, the idea is that freelancers and businesses will be more aware of exactly how much tax they’ll owe throughout the whole year, rather than just conveniently ignoring it until January, then being horrified by the inevitable bill. Plus, HMRC are hoping that digital tools will help people file their taxes more accurately, helping to reduce the “tax gap” (that’s the disparity between the amount of tax that’s owed versus the amount of tax that’s collected).
All of this sounds well and good, but in reality, things rarely run so smoothly – and that’s why plenty of freelancers are concerned. “Making Tax Digital may streamline things for HMRC, but it adds admin, further compliance and cost to small businesses,” says Croker. “Ultimately, it risks squeezing entrepreneurs at a time when they should be focusing on innovation and expansion.”
At a time when many freelancers are struggling to find work, and when small businesses are finding it hard to ride out the cost-of-living crisis, is arguably not the perfect moment to drop an increased admin burden on precisely those people. Yes, some of the software options approved by HMRC are free, but the majority come at a cost. And that’s without taking into account the time you might have to spend getting to grips with the new systems (when you might otherwise have, you know, been doing some paid work).
Ultimately, it risks squeezing entrepreneurs at a time when they should be focusing on innovation and expansion
Matt Croker, Heligan Group
Making Tax Digital, Croker continues, is being “sold as a move towards efficiency”, but “the general consensus is that the system prioritises compliance over practicality”. Back in 2023, the Public Accounts Committee (PAC), the cross-party group that examines government spending, said in a report that HMRC had “lost sight of needing to put customers at the heart of changes to the tax system”; more recently, the PAC estimated that the costs of Making Tax Digital will exceed any potential savings by around £200m each year.
Meanwhile, Owens says that he can understand the rationale behind moving towards a more modern system, because in principle, “it does make a lot of sense to try to nudge people along to take advantages of the efficiencies that are available through having software that syncs to your bank account” or sends and records invoices automatically. The previous approach, he says, “was really well suited to an era when collating all the information regarding business income and outgoings might have taken many months, and when calculations were prepared manually, usually by printing off bank statements and looking through all that”. But now, “a lot of that information is available in real time”. And, he adds, the fact that a lot of freelancers inevitably wait up until the last minute to submit their January return places a “big burden” on them and on HMRC.
And yet, he notes, the potential advantages won’t necessarily be equal across the board. “Your average unincorporated business that would have a lot of income and a lot of expenses that vary month on month”, for example, may notice significant time savings and find that “having that accurate information is really useful”. But there is a “big difference”, he says, between their set-up and that of “your average freelancer, who might not have a lot of income, and might not have a lot of expenses”. Those in this situation will find that “there is just a bit more of an admin burden”.
And if you miss the deadlines over and over, there will be fines. “HMRC has also introduced a new points-based penalty system that only penalises persistent late filers rather than the occasional error, but those in the system will need to ensure they file regularly and on time,” says Yogesh Dhanak, senior technical advisory manager at ACCA, the global accountancy body. Think of it as the tax version of getting points on your driving licence. When you notch up a certain number of points, you’ll have to pay £200.
As Owens puts it, Making Tax Digital is “happening whether you like it or not, so we’ve just got to adapt to changes”. So what can we start doing now, to make things slightly less painful from next April? All of the experts I survey agree that the best thing you can do is to start getting on top of your records and getting to grips with any new platforms right now. “Speak to an adviser as they will be able to assist you in understanding your specific requirements for Making Tax Digital, when you may need to comply and what software solutions are most appropriate for you,” says Russell Frayne, director of transformation at accountancy firm Gravita. “Understanding your requirements early, taking time to get used to any software and creating the habit of keeping your records up to date will set you up ahead of having to file your first quarterly update.”
So, essentially, start early, stick the deadlines in your calendar… and maybe try spending the next few months becoming best pals with an accountant.
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