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:

• April 2026:Sole traders and landlords with income above £50,000 must comply.
• April 2027:The threshold falls to £30,000.
• 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:

• Four quarterly updates
• An end-of-period statement
• 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:

• Maintain a simple digital ledger
• Submit quarterly updates
• Upload spreadsheet data
• 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:

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

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

Episode Timecodes

• 00:00 – Introduction and the broken tax deal
• 00:45 – What Making Tax Digital means
• 01:45 – Timeline for MTD rollout
• 02:40 – Why this creates a software tax
• 03:40 – HMRC’s justification and the tax gap
• 04:20 – Why a government tool should exist
• 05:00 – What action business owners can take
• 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.