However, HMRC’s decision to withdraw free filing software adds another layer of complexity, raising concerns that many may struggle to meet their tax obligations.

New Requirements and Growing Costs

Under the new MTD rules announced in the Spring Statement:

• Mandatory Use of Third-Party Software: From 2026, all MTD users will need to file tax returns, maintain records, and submit quarterly updates using commercial software.
• Phased Rollout:
  • Tranche 1: Gross income over £50,000 – MTD starts April 2026.
  • Tranche 2: Gross income over £30,000 – MTD starts April 2027.
  • Income over £20,000 – Mandatory quarterly filings from April 2028.

With the removal of HMRC’s free online filing system, around 4.5 million taxpayers, who previously relied on the service, will need to shift to third-party software – a change that could increase their costs and create confusion.

Impact on Low-Income Taxpayers

Sharron West, technical officer at the Low Incomes Tax Reform Group (LITRG), highlights concern that small businesses and self-employed individuals, many of whom make modest profits or even fall below the tax threshold, will struggle to adapt to this change.
West states:

“Many of the small businesses who will be in scope for MTD from April 2026 make very modest profits, and there will be some that aren’t even making enough money to pay tax or national insurance.”

Without free HMRC software, unrepresented taxpayers may face added financial burdens and uncertainty in choosing suitable software, which may offer limited support.

Limited Free Software Options

Although HMRC has promised free software options for smaller businesses, the choices are currently limited. Sage is one of the few providers offering a basic free MTD-compliant software option, but there is no guarantee this will remain free long-term. The LITRG warns that the functionality and support available with free software may be inadequate for users unfamiliar with digital tax systems.

LITRG Calls for Support and Flexibility

To ease the transition, LITRG urges HMRC to:

Enhance Support for Taxpayers: Offer more robust guidance and assistance, particularly for low-income individuals.

Expand MTD Exemptions: Provide relief for those who genuinely cannot adapt to digital record-keeping.

Delay Penalties: Postpone penalties for late or inaccurate filings until businesses have had time to adjust.

Tips for Preparing for MTD

Explore Software Options Early: Compare available third-party software solutions and test free versions to determine which works best.

Consider Professional Support: If possible, seek advice from an accountant or bookkeeper to ease the transition.

As the phased rollout continues, taxpayers are encouraged to prepare in advance to avoid confusion and unexpected costs.