Episode 19 The Tax Rules That Are Changing, And What You Need To Do Right Now

If you've been anywhere near a small business forum or Facebook group recently, you've probably come across a lot of noise about MTD and the trading allowance, and possibly come away feeling like everything is about to change and you're already behind.

In this episode, Annie cut’s through that noise to give you a calm, clear picture of what's actually happening, when it's happening, and most importantly, whether any of it changes anything for you right now.

Because for most home bakers, the urgent action list is a lot shorter than the headlines suggest.

In this episode:

• What Making Tax Digital (MTD) actually is and how it's being phased in
• The income thresholds: who MTD applies to and when (April 2026, 2027, and 2028)
• What quarterly submissions actually look like in practice
• The trading allowance vs the Self Assessment threshold — and why they're being confused
• Why the "£3,000 tax-free" idea isn't quite right
• Three questions to ask yourself to work out where you stand right now
• Why building digital record-keeping habits now is worth doing regardless of MTD

Want to go deeper?

April is finance month inside the Home Baking Business Academy. We're covering record-keeping and expenses, tax changes and MTD in practice, National Insurance and payments on account, and a full step-by-step Self Assessment walkthrough — designed specifically for home bakers, in plain language.
 Join The Home Baking Business Academy Membership

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Glossary:

HMRC: His Majesty's Revenue and Customs

GROSS INCOME Your total income before anything is deducted. For a home baking business, this is everything you've been paid for your orders, before you subtract any expenses or tax.

NET INCOME (also called PROFIT) What's left after your allowable business expenses have been deducted from your gross income. This is the figure HMRC uses to calculate your tax bill — not your gross.

MTD: Making Tax Digital

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For her website with all this and more:

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Transcript

SPEAKER_00 0:04

Hello and welcome to the Profitable Baker Podcast, the show for bakers who mean business. I'm Annie Bennett, founder of the Home Baking Business Academy, and every week I'll be sharing practical lessons, mindset shifts, and inspiring stories from bakers who are building businesses they love. Because success in this industry isn't about who bakes the fanciest cakes, it's about who builds the strongest business foundations. Let's get started. Hello and welcome back to the Profitable Baker Podcast with me, Annie Bennett. Now, today's episode is one I've been deliberately holding back on, not because the topic isn't important, but because I wanted to give you something that was thought through and genuinely useful. Now, if you've been anywhere near a small business forum, a Facebook group, or even just a Google search about self-employment tax in the last few months, you will almost certainly have come across two sets of initials that seem to be causing quite a lot of anxiety in the sole trader world right now. One is MTD, making tax digital, and the other is the trading allowance. And depending on where you read about them, you might have come away feeling like everything is changing immediately, that the HMRC is about to completely overhaul how you manage your tax, and that if you haven't already done something about it, you're already behind. So I want to spend this episode doing something that I think is actually quite valuable, giving you a calm, clear picture of what is actually changing, when it's changing, and more importantly, whether it changes anything for you right now. Because for many home bakers listening to this, the urgent action list is a lot shorter than the headlines might suggest. So let's get into it. That tax changes are genuinely unsettling. Even when the changes aren't dramatic, the language around them, quarterly reporting, digital records, thresholds, compliance, it all sounds very official and very serious. And when you're running a small baking business, often on your own, often without an accountant, the last thing you want to feel is like you've missed something important or that the rules have changed without you noticing. So if you've seen the headlines and felt a flicker of anxiety, that's completely understandable. Normal response to information that feels complicated and high stakes. But here's what I found consistently. When I actually sit down and look at these changes properly, the reality is almost always less alarming than the headline. And as a qualified bookkeeper, I can tell you that although I know the system, I know how the HMRC works, I can also see how much simpler it is than people bakers often think it is. I see lots of bakers being put off starting a business altogether because they don't understand the tax system and they don't understand how it affects perhaps the job that they're in. And I'm here to tell you that it's a lot simpler than it might at first appear. So let's talk about what is actually happening. There are two things I want to cover in this episode. The first is making tax digital, often shortened to MTD. The second is the changes to the trading allowance and the self-assessment threshold. These are separate things and they get mixed up a lot, so I want to treat them separately. Let's start with making tax digital because this is the bigger of the two in terms of what it actually involves. Making Tax Digital, MTD, is a government initiative that's been in the works for several years now. The idea behind it is to modernise the UK tax system. Instead of every sole trader doing one big annual self-assessment tax return, the plan is to move towards a system where you keep digital records throughout the year and send summary updates to the HMRC every quarter, so every three months. So four times a year rather than once. Now, I know that might sound like more work, and we'll come to that, but the first and most important question is: does this apply to you? And the answer for the majority of home bakers running a small business right now is not yet. Here is how it's being rolled out. From April 2026, so we're talking about the tax year that starts in just a few weeks from the time I'm recording this. Making tax digital for income tax will apply to sole traders and landlords whose gross income from self-employment and property combined is over £50,000. Gross income. That means your total turnover, the money coming into your business before any expenses are deducted. And just to note that these thresholds don't include any income that you have from employment. We're just talking about income from business or property. Then from April 2027, so this time next year, the threshold drops to 30,000. And in April 2028, it will drop to 20,000. So the question to ask yourself right now is simply: what is my gross annual turnover from my baking business? In other words, what's the total income I've had in? If it's under £50,000, and for most home bakers running a small business, it may well be, then making tax digital will not apply to you this year. You can continue with your self-assessment exactly as you have done. If it's approaching or over £50,000, then yes, this might well be relevant to you from April. And there are things that you need to do. But even then, the HMLC has built in some grace around penalties for the first year to ease the transition. So don't worry about that word penalties. Everything is made as simple as it can be for you. And for everyone else, the vast majority, the message is be aware of it and start building good digital habits, but there is no immediate crisis. Now I want to spend a minute on what MTD actually means in practice because I think an understanding of the shape of it makes it feel less scary. Under the current system, once a year and by the end of the 31st of January, you file a self-assessment tax return covering the previous tax year. You declare your income, your expenses, your profit, and the HMRC works out what you owe. Under making tax digital, the annual return doesn't disappear entirely, but you also will send four quarterly summaries throughout the year. Think of them as progress updates, a snapshot of your income and expenses for that three-month period. You're not calculating your tax bill four times, you're just keeping the HMRC informed of how things are going. Now, the crucial thing is that these quarterly updates will have to be sent using HMRC approved software. You can't do it on paper and you can't do it through a basic spreadsheet unless it's connected to what's called bridging software. But we won't go into that, it's making it too complicated. There are free software options available and there are paid options. And when the time comes for this apply to you, choosing the right software for your business will be an important practical step. But again, for most of you listening right now, that decision point is still some way off. What I would say is this: if you're not already keeping your business records digitally in some form, this is a good moment to start moving in that direction. Not because you have to right now, but because building that habit early makes the eventual transition much smoother. Whether it's a simple Excel spreadsheet, and I have one in the Academy membership for members to use, whether it's a basic bookkeeping app or whether it's something more comprehensive, for example Xero or QuickBooks, getting comfortable with digital record keeping now means you won't be scrambling to change everything when the threshold does reach you. I will at some point in the Academy membership be talking through the software options for members. I will be looking at free options and paid options and the difference between each and what each gets you. So that will be coming into the Academy membership at some point over the next year. Right, let's move on to the second thing, the trading allowance and the changes to self-assessment thresholds. And I want to be really clear here because this is an area where the reporting has been quite muddled, and I've seen a lot of bakers come away with the wrong impression. You may have seen headlines saying something like the trading allowance is to triple or the self-assessment threshold rising to £3,000. And if you read those headlines quickly, it would be really easy to think that the amount that you can earn tax-free from your baking business is about to go up, but it isn't. And I want to explain why, because the distinction matters. Now, the trading allowance, the amount you can earn from self-employment completely tax-free, it's sometimes called the hobby allowance, but officially it's called the trading allowance. That remains at £1,000. That hasn't changed and it's not going to change. It's been £1,000 since it was introduced, roughly 10 years ago, and it stays at £1,000. What is changing, but not until the 27-28 tax year, so we're talking about April 2027 at the earliest, is the self-assessment reporting threshold. So currently, if your gross self-employment income is over 1,000 in a tax year, you need to register for self-assessment and file a tax return. The change that's been announced means that from 2027-28, that registration threshold will rise to 3,000. And people earning between 1 and 3,000 from self-employment won't need to file a full self-assessment. But, and this is the important bit, that doesn't mean that the income between 1 and 3,000 becomes tax-free. It just means the admin requirement changes. You will report it in a different way. You may still owe tax on anything above the £1,000 trading allowance, the reporting process will just become simpler. So, if up to now you've been thinking, brilliant, I can earn £3,000 tax-free in my baking business, I'm really sorry to be the one to tell you that that's not happening. The tax-free element is still £1,000. What's changing is the paperwork threshold for lower earners, and it doesn't even come in until 2027. So for most of you running an established baking business, taking orders, selling at markets, all that kind of stuff, your income is likely to be well above those thresholds anyway. And your self-assessment position doesn't change based on this announcement. Now, I want to zoom out for a moment and talk about something a bit broader because I think it's relevant to how we process information like this as small business owners. We live in an information environment where bad news travels fast and nuance, there is that word again, I love that word, nuance travels slowly. A headline that says tax rules changing for sole traders gets clicks. A headline that says tax rules changing for some sole traders from 2027, but probably not you just yet. That really doesn't work as a headline, does it? And so what tends to happen is that people read the alarming version, get worried, and either spiral into anxiety about something that doesn't affect them net, or, and this is equally common, they feel so overwhelmed that they disengage entirely and decide just not to think about it. And none of those responses serves you well. Or the other thing that they do is they ask, often in Facebook groups, amongst people who, with the best will in the world, don't understand the whole system and are reporting perhaps third hand on what they've heard from someone who've heard from someone else, and they don't send out the right information. I see that an awful lot with a whole range of things. So, of course, none of this is going to serve you well. What actually serves you is doing exactly what you're doing right now, taking a bit of time to understand what's happening at a broad level, knowing enough to assess whether something is relevant to your situation and knowing where to go when you need the detail. That's not the same as knowing everything. You don't need to understand every technical aspect of making tax digital to run a successful baking business. What you need is enough of an overview to make sensible decisions and to recognise when something has crossed from good to be aware of into I need to actually do something about this. So let me give you a simple framework for thinking about all this. Because I find that when something feels complicated, breaking it down into a few clear questions really helps. This is my 30 years as a primary teacher kicking in here. So, question one. If your current gross annual turnover is between £20,000 and £50,000, MTD isn't quite relevant yet, but it will be in the next couple of years. And this is the time to start familiarising yourself with what it involves and what software might work for you. If your gross turnover is over £50,000, first of all, well done. What a business you've got. That's fantastic. And yes, MTD will apply to you from April 2026. And you need to be taking the steps now if you haven't done it already. Okay, question two, I'm going to ask you: are you currently registered for self-assessment and filing a tax return? If yes, carry on. Nothing about the trading allowance or threshold changes affect your current situation. If no, and your income is over £1,000 from self-employment within the last tax year, you will need to register after the end of this tax year, which is on the uh 6th of April. That's the current rule and it hasn't changed. Question three Are you keeping digital records in some form? If you are brilliant, think about whether your current system will be MTD compatible when the time comes. And as I've just said, people in the membership, I should be talking about all of that a little bit more as we go through the year. If you're not keeping any digital records, this is the one area where I gently encourage you to start making a change. Don't panic. No need to rush into anything, but just think about making a change. Not because you're in trouble right now, but because the direction of travel is clearly towards the digital. And getting comfortable with it gradually is much easier than having to do it all at once because you've been forced into it because there's a deadline coming. You want to be able to do it carefully, slowly, and calmly. I also want to say something about the broader context of all this because I think it's easy to lose sight of when you're in the middle of following the detail of tax changes. The UK tax system for sole traders hasn't fundamentally changed in terms of what you owe. You still pay income tax on your profits above the personal allowance. You still pay national insurance on your profits above the relevant thresholds. It's the how of reporting that is changing. Some of the admin is changing, but the core principle of what you're taxed on remains the same. MTD is essentially about moving from an annual catch-up to a more regular rhythm. And while that sounds like more work up front, the genuine argument for it, and I really can see this, is that if you're recording your income and expenses regularly throughout the year, you always know where you stand. You're not hit with a surprise in January. You're not trying to reconstruct 12 months of business activity from memory and bank statements. Whether HMRC's motivation for introducing it is primarily about your convenience or primarily about closing the tax gap. Well, that is a different conversation, and I'm not going to get into that. But as a practical matter, the habit of regular record keeping that MTD encourages is genuinely good for your business, regardless of the compliance angle. Now, before I wrap up, I want to address something directly because I know some of you will be listening to this and thinking, but Annie, I still don't understand what I'm supposed to do. And that's completely fair. Because what I've done in this episode is given you an overview, the reassurance that here's what's happening and here's the rough shape of it. What I haven't been able to do, because obviously it would take far longer than I can do in one episode, is walk you through the specifics, all the software, how to register, all that kind of stuff. That's the detail, and that detail is what is inside the Academy membership. This April we have a full month of financial training inside there, specifically designed for sole traders like you. We're covering record keeping and expenses, the tax changes, what they mean in practice, national insurance, payments on account, and a step-by-step walkthrough assessment. It's not generic small business advice, it's designed specifically for home bakers in plain language, with the things that are actually relevant to the way that you run your business. Details of how to join the Academy membership are in the show notes. Now, let me leave you with three things I really want you to take away from today. First of all, the tax changes that are getting the most attention right now are real, but they're being phased in gradually. And for most home bakers running small businesses, the immediate impact is limited. So please don't panic. Second, the one habit worth building right now, regardless of where you are with all this, is consistent digital record keeping. It serves you whether or not MTD ever applies to you, and it puts you in a much stronger position when it does. And third, staying informed is not the same as knowing everything. You don't need to understand every detail of tax legislation to run your business well. You just need to know enough to make good decisions and to know where to go when you need the rest. And that's what I'm here for. Thank you so much for listening today. If this episode has been useful, please do share it with another homebaker who might need to hear it. There are lots of people in this world who are quietly anxious about exactly these things, and sometimes just hearing someone explain it calmly makes all the difference. I'll be back next time with another episode of the Profitable Baker Podcast, where I'll be talking about record keeping, what the HMRC expects, and how long you should keep all those records for. So tune in next time. Until then, take care of yourselves, take care of your businesses, and I'll see you next time.