HMRC alert: Thousands could get surprise £500 tax bill for being 'on the wrong side of the rules'

The Government's Making Tax Digital scheme will force people over certain income thresholds to keep electronic records and file updates every quarter.

Financial advisers say the hidden costs of compliance could run between £300 and £500 a year once software, staff training, admin time and set-up fees are factored in.

For small operators, part-time landlords and those running side businesses, the added burden comes on top of already rising costs. Many fear it could tip some into debt or force them to scale back.

The rules are part of the Treasury’s wider push to digitise the tax system, but critics argue the changes risk punishing ordinary taxpayers rather than making life simpler.

However, concerns mount about the financial impact on part-time property owners and those running secondary businesses, who must absorb these additional expenses whilst navigating an already challenging economic environment.

The regulations will apply to anyone generating more than £50,000 from self-employment or rental properties.

Tax authorities have begun distributing correspondence to individuals expected to fall under these requirements, detailing their obligations and implementation schedules.

Craig Ogilvie, director of Making Tax Digital at HMRC, stated: "With April 2026 on the horizon, we are issuing letters to customers we believe will be mandated, outlining specific requirements and timelines."

The initiative extends previous digital tax reforms that began with VAT-registered companies in 2019.

Ogilvie added: "We urge those who meet the mandate criteria to join our testing programme on GOV.UK now to help shape the final service and make your transition smoother."

Self-employed individuals and property owners face potential yearly expenses of up to £500 to meet new digital tax requirements beginning in April 2026

Independent assessments of that programme indicated participating businesses experienced improvements, particularly in reducing record-keeping errors.

Approximately 864,000 sole traders and landlords will need to adapt to these changes when they take effect next year.

George Holmes, managing director of Aurora Capital, expressed serious reservations about the financial burden these changes will impose.

He said: "The Government says Making Tax Digital will modernise the tax system, but for 864,000 sole traders and landlords who need to comply from April next year, it's shaping up to be a costly compliance exercise."

Holmes detailed the various expenses involved: "Once you factor in paid-for software, setup time, training and ongoing admin, taxpayers could be looking at £300 to £500 a year just to stay on the right side of the rules.

That's a big ask for part-time landlords and side hustlers already dealing with rising costs and shrinking margins."

He questioned whether efficiency gains would justify these costs: "It remains to be seen whether or not the promised efficiencies will offset these added costs."

Holmes emphasised the need for greater support with the deadline approaching: "With the April 2026 deadline now less than 8 months away, if HMRC wants this first roll-out to be a success, it needs to provide tangible support.

Whether through free software options, better guidance or clear support for the digitally excluded. The risk is that those who can least afford it end up hit hardest." Treasury officials maintain the changes will benefit the economy.

James Murray MP, Exchequer Secretary to the Treasury, said: "MTD for Income Tax is an essential part of our plan to transform the UK's tax system into one that supports economic growth."

Murray added: "By modernising how people manage their tax, we're helping businesses work more efficiently and productively while ensuring everyone pays their fair share."

Tax advisers recommend affected individuals begin preparations immediately by acquiring compatible software and enrolling in HMRC's voluntary pilot scheme.