HMRC has published a policy paper outlining the expected costs and benefits the next phase of Making Tax Digital (MTD) is likely to bring.

New figures estimate that the implementation of MTD for income tax self-assessment (MTD for ITSA) will cost self-assessment customers around £320 each. However, the initial and ongoing costs will vary depending on the size of the business.

Sole traders and landlords making between £30,000 and £50,000 annually will face an average setup cost of £350. These individuals are also expected to incur ongoing costs of £110 a year. Meanwhile, those with earnings above £50,000 a year could incur transitional costs of £285 and ongoing annual costs of £115.

Overall, HMRC estimates a £561 million transitional cost and an ongoing net increase of £196m in tax compliance costs.

Breaking down the costs

According to HMRC, sole traders and landlords may face additional in-house training costs and accountancy fees as they transition to this new way of doing taxes. Business owners will also need to familiarise themselves with the new MTD for ITSA rules and processes, resulting in a greater administrative burden.

Meanwhile, ongoing expenses include monthly subscriptions to MTD-compatible software packages, extra time spent on quarterly updates, and the cost of bridging software for spreadsheet users.

As a result, HMRC estimates that the total IT and non-IT costs for this MTD phase will hit £500m by March 2028.

The expenses associated with MTD for ITSA will, however, vary from business to business. For example, sole traders and landlords already using cloud accounting technology or bridging software are likely to incur relatively little cost compared to those using more traditional accounting methods.

Other factors that could impact the cost to taxpayers include the size and complexity of the business and the price of the software used.

HMRC also noted that taxpayers can offset all MTD for ITSA costs against their profits to minimise their income tax bill.

Preparing for the next phase of MTD

With MTD for ITSA set to roll out from 2026, many self-assessment customers will soon need to familiarise themselves with the rules.

HMRC estimates that around 780,000 people with incomes over £50,000 will need to follow MTD rules from April 2026. In April 2027, a further 970,000 people making between £30,000 and £50,000 will fall under the scope of the scheme.

Currently, plans to expand MTD for ITSA to individuals earning below £30,000 are on hold. HMRC also has plans to extend the scheme to partnerships at a later date.

This phase of MTD, which aims to reduce errors and narrow the tax gap, is expected to generate £120m for the Treasury in the first year of implementation, rising to £465m by the 2027/28 tax year.

Commenting on the estimates, HMRC said:

"These measures are expected to improve businesses' experience of dealing with HMRC as managing their tax affairs will be simpler.

"Once businesses are used to operating the new MTD processes, we anticipate that they will find that MTD makes it easier for them to get things right and reduce errors."

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