HMRC warning as 800,000 risk being caught out by 'biggest tax change in a generation'

The changes form part of the Making Tax Digital programme, which was first announced in the 2015 Budget but has been delayed several times.

The scheme will finally become mandatory from April 6, applying to anyone whose rental income or self-employment earnings exceeded £50,000 in the 202425 tax year.

Tax professionals have described the move as the "biggest change in a generation", yet warn that many people who fall into this group remain unaware of their new responsibilities.

The Chartered Institute of Taxation estimates that around 850,000 individuals will be affected in the 202627 tax year.

Under the new system, those within scope will be required to submit quarterly updates to HM Revenue & Customs, reporting their combined income, expenses and profits.

These updates must be filed using approved digital software, rather than through the traditional paper or online forms.

The shift marks a significant departure from the current annual self-assessment process that millions of taxpayers have relied on for decades, and advisers are urging those affected to act now to avoid falling behind.

The scope of the programme will expand significantly over the coming years. From April 2027, the income threshold drops to £30,000, bringing substantially more people into the digital reporting framework.

A further reduction to £20,000 follows in April 2028, at which point the Chartered Institute of Taxation estimates at least three million individuals will be subject to the quarterly filing requirements.

Taxpayers must select software from a government-approved list of providers to maintain their records and transmit information to HMRC.

Industry experts have expressed serious concern about the level of unpreparedness among those who will be affected.

"In general, there's a real lack of awareness of MTD obligations," said Simon Armstrong, outsourcing director at accountancy and business advisory firm Menzies.

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"Many business owners already dealing with economic pressures and recent Budget changes have not prioritised understanding or prepared for MTD compliance."

Nikita Cooper, partner at accountancy firm Price Bailey, noted that numerous individuals caught by the changes remain "unsure of what this means and practically how and what they need to do".

Claire Roberts, tax partner at Moore Kingston Smith, cautioned that hundreds of thousands of people would be "scrambling around after January 31 to sign up and understand what they need to do before April".

Accountancy firm Price Bailey has outlined several preparatory measures for those affected, including registering for an MTD online gateway, establishing separate business and personal bank accounts, and obtaining compliant software that integrates with both their financial records and HMRC systems.

While some software providers offer free services, tax advisers caution these will likely prove adequate only for individuals with the most straightforward tax affairs.

Many people remain unaware they will need to pay for appropriate software, according to industry professionals.

Mr Armstrong called on the tax authority to dramatically improve its communication efforts, stating: "HMRC needs to significantly strengthen its public awareness efforts. Current messaging appears to oversimplify the level of change involved, particularly the investment required in software, systems and processes."

Tax experts have also raised concerns about whether HMRC itself is ready for the changes, not just whether the public understands them

Jack McConnel, investigator at think-tank TaxWatch, characterised the changes as "the biggest change in a generation for how nearly 3mn people will do their taxes", but added: "While MTD is meant to simplify and digitise tax, the technical readiness of HMRC's infrastructure remains a major concern."

Industry sources indicate numerous digital interfaces required for the system remain under development, with Mr McConnel warning that testing may involve real taxpayer data, raising both privacy and accuracy concerns.

HMRC said: "We've worked extensively with customers, representative bodies and software developers to ensure Making Tax Digital works for small businesses and landlords, helping them prepare for the change.

"It will ensure that more businesses get their tax right, avoiding the worry, cost and burden of extra work when things go wrong, helping to close the tax gap. It will also give customers a better view of the health of their business."