The UK government is changing how small businesses and self-employed people file taxes. This initiative, called “Making Tax Digital 2026,” aims to modernise tax processes and improve compliance. However, many businesses are worried about the costs and confusion these changes will bring.
What Will Change in 2026?
Starting in 2026, self-employed individuals and landlords earning over £50,000 must keep digital records and submit quarterly updates using specific software. While this may be easy for tech-savvy entrepreneurs, many small businesses still use spreadsheets or paper, making this a big challenge. They will need to change their workflows, buy new technology, and train staff on new methods.
Additionally, small business owners are already stressed by regulations, rising energy costs, and recovering from the pandemic. This new tax system feels like another heavy burden. While the government sees it as a way to improve efficiency, many business owners view it as a tough climb with an unclear outcome.
Why the UK Is Going Digital – A Quick Look at MTD
The Making Tax Digital 2026 reform is part of a bigger plan to modernise the UK’s tax system. HMRC believes that using digital tools will make tax management more accurate and efficient, and it will be harder to avoid paying taxes. This plan aims to reduce mistakes and improve transparency for everyone.
Economic Benefits and Practical Concerns
Tax digitisation helps HMRC collect data in real-time, reduce fraud, and enhance audits. This shift makes sense in a digital economy where most businesses are online. However, what the government plans and what happens in reality can be very different.
The government wants to implement these tax changes for small businesses, many of which have narrow profit margins and limited tech resources. This has led to discussions about fairness. Large companies can easily adjust to the Making Tax Digital 2026 rules because they already have accounting systems and tech teams. In contrast, smaller businesses often lack the time, money, and skills needed for a smooth transition. Experts are concerned that MTD could create an unfair tax system that benefits larger companies while disadvantageous to smaller ones.
The Hidden Costs Behind Compliance
One major worry about the UK tax changes for small businesses is cost. The Federation of Small Businesses reports that tax compliance already costs small and medium-sized enterprises (SMEs) about £4,500 each year. With the new HMRC digital tax rules, these costs are expected to increase due to the need for better accounting software, staff training, IT upgrades, and possibly hiring outside bookkeeping help.
Subscription and Software Maintenance Expenses
Switching to tax software for small businesses in the UK might seem like a one-time cost, but ongoing updates, subscriptions, and support can add up quickly. Businesses may also need to buy new hardware or backup systems to keep their data safe and private. These extra costs often go unnoticed until they become necessary.
Additionally, small businesses might face penalties for not following rules, filing late, or making mistakes, especially during their first year of using the software. The financial burden of adopting digital systems, along with the risk of penalties, can make what was meant to be a simple process stressful.
How Prepared Are Small Business Owners?
Surveys show that many small businesses are not ready for upcoming changes. A recent report found that 10% of small business owners don’t know about Making Tax Digital 2026, and 21% don’t fully understand the digital record-keeping rules for 2026. These findings highlight a significant gap in information.
Support and Education Gaps
Only one in seven people feel ready. This is concerning, especially since the deadline is less than two years away. Confusion about requirements and lack of reliable guidance puts small businesses at risk of not meeting regulations. Some businesses don’t know they fall under the income limit or think their current software is compliant when it isn’t.
Business support organisations and local councils should increase awareness campaigns and offer educational workshops to help more small businesses get informed on time. At the same time, accountants and advisors, like Clarkwell & Co. Chartered Accountants are becoming essential for those seeking clarity.
Impact on the Self-Employed, Landlords, and Freelancers
Digital tax rules greatly affect self-employed workers, landlords, and freelancers in the UK. These individuals often relied on filing their taxes once a year with little bookkeeping throughout the year. Now, they must track their income and expenses regularly using digital tools.
Complexity for Casual Income Earners
Switching from a reactive to a proactive accounting model needs new software and a big change in thinking. Many people will have to learn new tools or hire someone who knows how to use them, which will raise costs. For instance, part-time landlords or freelancers earning over £50,000 may face requirements they aren’t ready for.
Additionally, many of these individuals don’t see themselves as traditional businesses. They might just be renting out a spare room or doing extra work for money. However, HMRC considers them taxable entities under the new MTD rules, regardless of how they view themselves.
Are the Tools Ready? The Software Side of the Story
Is the software ready for these changes? Some advanced platforms have compliance features, but not all UK tax software for small businesses meets HMRC’s new standards. Many budget tools also lack support for multiple users, bank connections, or quarterly updates.
The Risk of Choosing the Wrong Tool
Small business owners often switch platforms or upgrade to expensive plans, which not everyone can afford. If the UK government wants Making Tax Digital (MTD) to succeed, it may need to regulate software prices or provide subsidies. Many industry groups have requested tax relief or grants to help cover the initial costs of moving software.
Even compliant software options can vary in features, causing confusion. Some packages integrate with point-of-sale systems or inventory management, while others do not. Picking the wrong system can lead to more problems. Trusted accountants’ guidance and reviews are crucial at this point.
The Broader Economic Picture – Is This the Right Time?
Many small and medium-sized enterprises (SMEs) are struggling due to inflation, high energy costs, and supply chain problems. Requiring them to upgrade their tax technology adds more financial pressure. Industry groups like the FSB and ICAEW have questioned the timing of the UK digital tax reforms set for 2026.
Calls for a Phased Implementation
These reforms align with other UK tax changes and challenges for small businesses, creating strong economic pressure. As a result, some businesses may decide to close instead of dealing with compliance issues. Business failures have increased recently, and more could happen if Making Tax Digital (MTD) is implemented too rigidly.
To help, some experts propose a gradual rollout or a longer grace period for small firms. Others suggest delaying penalties for the first year to give businesses time to adapt. If the goal is lasting compliance, we may need to show understanding in the short term.
What Support Exists for Struggling Businesses?
HMRC has started a pilot program and provides online resources to help businesses adjust. However, few businesses are participating. Many owners feel stressed and don’t have time to join the trial programs, especially those managing many roles in their operations.
Clarkwell & Co.’s Support for SMEs
Clarkwell & Co. Chartered Accountants helps businesses with Making Tax Digital. Our team of expert accountants in London guides clients through the rules, helps them pick the right software, sets it up, and trains their staff. We also support clients during HMRC investigations, making sure they stay compliant and stress-free all year.
Our services include more than just MTD. We provide tax advice, business planning, and help with Capital Gains Tax and other financial issues. Whether you’re starting a new business or running an established one, our local knowledge means you have support as you adapt to these changes.
How to Get Ahead – Proactive Steps You Can Take
Don’t wait until 2026 to take action. Start by checking your current bookkeeping process. Are you using spreadsheets or paper logs? If yes, think about switching to digital options. Test small business tax software in the UK and see which one fits your needs and budget. Make a checklist and timeline to monitor your progress toward full compliance.
Partnering with Professional Advisors
Partner with experienced advisors, like our team at Clarkwell & Co., to make sure your systems follow the rules. We help with Capital Gains Tax Service London filings and explain HMRC tax changes for 2026, providing guidance specific to your business.
Also, create internal documents, assign roles, and plan monthly check-ins to track progress. Staying proactive can save your business from last-minute stress and costly fines. With the right strategy and expert support, the shift to Making Tax Digital can be an opportunity for growth instead of a challenge.
