In this episode of the I Hate Numbers podcast, we discuss something that many small business owners have not fully realised yet — the hidden cost behind Making Tax Digital for Income Tax. For decades the system was straightforward. You earned money, logged onto the government website, submitted your tax return, and paid what you owed. It was a public service funded through taxes. However, from April 2026 that arrangement changes significantly. HMRC will close the free self-assessment filing portal for many taxpayers and require the use of third-party software instead. We call this the software tax.

What Is Making Tax Digital for Income Tax?

Making Tax Digital (MTD) is HMRC’s long-term programme to modernise the tax system and reduce errors in reporting. In theory, digital record-keeping can reduce mistakes and improve efficiency. We support digital accounting in principle. In fact, tools like Xero cloud accounting can save time, improve visibility, and help businesses make better decisions. But the concern is not digitalisation itself. The concern is forcing taxpayers into paid software just to comply with the law.

The Timeline for MTD

The rollout schedule has already been announced:

1. April 2026:Sole traders and landlords with income above £50,000 must comply.
2. April 2027:The threshold falls to £30,000.
3. Future plans:The threshold could fall to £20,000.

Importantly, this threshold refers to income, not profit. That means even relatively small businesses may fall within the rules.

More Reporting, Not Less

Instead of filing one tax return each year, businesses will need to submit:

1. Four quarterly updates
2. An end-of-period statement
3. A final declaration

That means significantly more reporting — and all through third-party software.

Why This Creates a “Software Tax”

HMRC’s official position is that taxpayers must use recognised commercial software. In effect, this creates a new financial burden. To comply with tax law, individuals must now enter a commercial marketplace and pay for software subscriptions. Some providers offer “free” tools, but many of these operate on a freemium model where additional features quickly trigger subscription fees. Even some bank-provided software requires you to open accounts with specific institutions. Access to tax compliance should not depend on where you bank.

The Government’s Justification

HMRC estimates the UK tax gap at around £46.8 billion. A large proportion of this gap comes from small business errors or incomplete reporting. Digital systems could certainly help reduce those mistakes. However, if the government expects taxpayers to adopt new digital systems, it could reasonably provide a basic free tool to enable compliance.

A Practical Solution

We are not asking for government software that replaces commercial accounting tools. Instead, we believe a basic state-owned compliance tool should exist that allows taxpayers to:

1. Maintain a simple digital ledger
2. Submit quarterly updates
3. Upload spreadsheet data
4. File their final declaration

Spreadsheets are already digital. There should be a straightforward way to upload them without needing paid intermediary software.

Why This Matters

This is not simply a technical change. It is about fairness and accessibility. Tax compliance has historically been free at the point of use. Requiring businesses to purchase software simply to fulfil legal obligations introduces a new cost for millions of taxpayers. Small businesses, freelancers, and landlords will be affected most.

What You Can Do

If you care about keeping tax compliance fair and accessible, there are a few practical actions you can take:

1. Sign the petition to stop the software tax
2. Write to your MP
3. Share the issue with other business owners and freelancers
4. Spread awareness about the impact of Making Tax Digital

You can learn more and support the campaign here: 🔗 Stop the Software Tax CampaignEpisode Timecodes

1. 00:00 – Introduction and the broken tax deal
2. 00:45 – What Making Tax Digital means
3. 01:45 – Timeline for MTD rollout
4. 02:40 – Why this creates a software tax
5. 03:40 – HMRC’s justification and the tax gap
6. 04:20 – Why a government tool should exist
7. 05:00 – What action business owners can take
8. 05:30 – Final thoughts

Further Support

📘 Book https://www.ihatenumbers.co.uk/i-hate-numbers-book/ 🎧 Podcast https://www.ihatenumbers.co.uk/i-hate-numbers-podcast/ 🌐 Website https://www.ihatenumbers.co.uk If this episode helped clarify the changes around Making Tax Digital and the growing conversation around the software tax, share it with another business owner who needs to hear it. Plan it. Do it. Profit.

Welcome to another episode on I Hate Numbers and today I want to talk about a deal that's being broken, a tax deal, a deal that has existed for decades between the UK government and the small business community. And if we don't act now, if we bury our heads in the sand, it is going to cost all of us money and it's time to talk about the software tax.

Now for many years, the arrangement was quite simple. You earn money, you owe tax. You log onto the government website, file your return for free and pay them what you owe. It's a public service funded by all of our taxes. Now from April, 2026, the policy announced many years ago, HMRC is effectively breaking that deal.

They're turning off that free online portal for millions of self-employed people and landlords, freelancers, and replacing it with a system called Making Tax Digital for Income Tax - MTD for short. Now, don't get me wrong, I'm a big believer I digital accounting. I know that moving to the cloud saves time, reduces errors and boosts profits, but I draw the line that the government mandating a digital system without providing the basic tools to use it.

Just imagine for a moment if the DVLA told you that you had to have a digital driving license, but the only way to get one was to pay a private company a certain amount of money each month for an app. You'd be rightly outraged. Well, that is exactly what's happening with your taxes. Now, the timeline, and it's not a rumour, some people still think MTD is just a rumour.

It's being kicked into the long grass on many occasions, but it's been delayed before, and likely to be delayed again. But I'm here to tell you at this moment in time that juggernaut of MTD is already accelerating. The deadlines have been set in stone. Now, what are they? From the 6th of April, 2026, if you're a sole trader or a landlord

with a qualifying income over 50,000 pounds, you are in no choice. And that 50,000 pounds, by the way, was for the 24-25 tax year. From April 27, the threshold drops, so if in 25-26, your income (not profit), your income from self-employment and or property income is between 30 and 50, you are next. And then the year after that, the plans are to drop the threshold to 20,000 pounds.

Now, this isn't just for big corporations, it's the local plumber, the freelance graphic designer, the landlord with a single rental property, and the rules are changing. Instead of one tax return a year, you'll be sending four quarterly updates and end of period statement and a final declaration. And HMRC is refusing to provide the software to do that, even though on the initial policy announcements, they said they were going to provide free software and not create those barriers.

Let's talk about the software tax - the reality. Now, HRMC’s official stance now is that taxpayers must use recognised third party software. This effectively in my mind, privatises tax collection. It forces you to enter a commercial marketplace to fulfil a legal obligation, and this is what I call the software tax.

Now, HMRC will tell you, as others will, there's free software available. Well, I've checked out that free market. Let me tell you, the reality is slightly different from the promise. Now, most free software is actually freemium. It's either a marketing hook, you might get so many invoices processed for free.

As soon as you get to number 11 or whatever that number would be for the software provider, you're hit with a pro subscription fee. Or maybe it's free for one property, but at the moment you buy a second buy-to-let, the price tag appears. Even the free software offered by many banks has a catch. You have to bank with them.

Access to a fair tax system should not be conditional on who you choose to bank with. Now, I'm not just complaining about this. As I said, I think digital software stands on its own merits. I'm a big believer of that. Now, I'm not just complaining here. I've already written letters myself to the Treasury why the government should build a free tool.

But let's talk about the tax gap for a moment - the big driver behind this. HMRC's latest estimate suggests there's a 46.8-billion-pound gap between what should be paid and what is actually paid, much of this coming from error in carelessness in small businesses. Now, if a government stands to recover billions of pounds by reducing errors (and who wouldn't support that?),

they should invest in the tool that prevents them. Providing a clean, simple, standardised government app would ensure data is entered correctly. It's a small investment for a potentially massive return. There's ROI in that app, and there is a precedent. Look at universal credit. When the government moved the welfare system online, they built the portal themselves.

They didn't tell millions of claimants to go and buy software from a private company to get their money. So if a free digital interface can be built for benefits, it can be built for Income Tax. The technology exists, only the political will is missing. So what's our demands? Well, we aren't asking for a fancy tool that competes with the likes of Xero.

We love those platforms, by the way. We're demanding a basic compliance tool, a simple state-owned utility that lets you keep a digital ledger, file your four quarterly updates and crucially a bridging tool. If you love your spreadsheets, you should be able to keep using them. Spreadsheets are digital and HMRC should provide a way for you to upload your files directly without a toll fee.

So what would we like you to do? Well, it's about fairness. It's about ensuring that tax compliance remains free at the point of use. And we need your help to make this happen. We've already launched a petition. We've got assets, pictures, letters. We want t take this fight to the Treasury, but we need the numbers to back it up.

So please check out Stop the Software Tax at I Hate Numbers. Sign the petition. Add to the growing numbers. Write to your MP. We've got a template letter on the website. Spread the word. Tell your self-employed friends. Tell your freelancer friends. Get involved. Help us spread the message and make other people aware of that.

As W.E.B. Du Bois said, when you've mastered numbers, you'll be reading meanings. Let's make sure the meaning of your numbers isn't just more cost for small businesses. Let's keep tax fair. Plan it, do it, profit.