Is HMRC Planning a New Tax Raid? How You Can Protect Yourself in the UK!
- Adil Akhtar
- 4d
- 31 min read
What’s Going On — Is HMRC Planning a New Tax Raid?
Picture this: You open your bills one morning, and there’s a letter from HMRC. More compliance checks. Fewer loopholes. “Raid” headlines in the papers. Sound familiar? Over the past year (2024-25 into 2025-26), there has been a real ramping up of HMRC’s enforcement, and several structural changes that mean more people are likely to come under scrutiny. But a lot of what you hear is exaggerated. What’s real, what’s upcoming, and how you can protect yourself.
What “Tax Raid” Claims Mean (and What They Don’t)
When people say “tax raid”, they usually mean one or more of:
● HMRC increasing audits, investigations, or compliance checks on taxpayers
● Changes in law or thresholds that force more people into paying tax or reporting income in new ways
● Removal or reduction of tax reliefs, or freezing of allowances
● New reporting requirements or digital record-keeping
What’s not always true, but often implied: blanket tax hikes or sudden retrospective penalties for everyone. In most cases, HMRC is tightening up on what already exists — where it believes people are under-reporting, or not being compliant with existing rules.
What Recent HMRC Moves Really Suggest
From my experience advising clients across Manchester, London, and smaller firms in the Midlands, here’s what I’ve noticed as concrete signs:
More Compliance Staff & Targeting the Tax Gap
The government has allocated funds to increase HMRC’s compliance and debt management teams. Specifically, in the Spending Review 2025, there’s a commitment of £1.7 billion over 4 years to fund an additional 5,500 compliance staff and 2,400 debt-management colleagues. GOV.UK+1
That means HMRC is getting more eyes and more resources to check whether people are paying what they should. It’s not just wealthiest individuals: this is about small businesses, landlords, gig workers, side hustles. And it shows the state believes there are large sums “leaking” via non-compliance. From real bookkeeping work, those extra checks often focus on areas where reporting has traditionally lagged: property income, freelance income, foreign income.
Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA) Is Coming
Perhaps the biggest structural change. From 6 April 2026, self-employed individuals and landlords with gross (i.e. before deducting expenses) business/property income over £50,000 will have to keep digital records, use MTD-compatible software, and submit quarterly updates to HMRC. taxscape.deloitte.com+4GOV.UK+4LITRG+4
Then, from April 2027, threshold lowers to £30,000, and from April 2028 to £20,000. LITRG+2Gerald Edelman+2
What this means in practice: HMRC will see your income/expenses more regularly, not just at year end. You can’t hide mistakes (intentional or not) so easily. Errors add up faster.
Frozen Allowances / Fiscal Drag
The personal allowance, basic rate, higher rate thresholds, etc., have largely not increased in line with inflation or wage rises. They are frozen until April 2028. House of Commons Library+2growthcapitalventures.co.uk+2
So as more people’s incomes rise (inflation, promotions, side incomes), more get pushed into higher tax brackets (higher rate, additional rate), or lose part or all of their personal allowance (if earning above ~£100,000). That’s “stealth tax” or “tax raid” in some headlines.
Grow of Enforcement / Whistleblower / Closure of Loopholes
HMRC is also moving to close known risk areas. Whistleblower incentives have been strengthened. There is more use of technology (data matching, “Connect”, third-party data, foreign income data) to detect discrepancies. Phoenixing (companies dissolving and restarting to avoid debts), complex avoidance schemes, etc., are under greater scrutiny. GOV.UK+3Financial Times+3The Guardian+3
What Actual Numbers & Tax Rules Look Like in 2025/26
To make good decisions, you need the up-to-date figures. Here are the major income tax / National Insurance / relief rules you must know for 2025-26:
Item | 2025-26 figure / rule | Why it matters |
Personal Allowance | £12,570 House of Commons Library+2PwC Tax Summaries+2 | Income up to this is tax-free (for most people). Above ‘£100,000’, this allowance is gradually withdrawn. If you hit ~£125,140, it’s gone. |
Income Tax Bands (England, Wales, Northern Ireland) | • Basic rate: 20% on income between £12,571-£50,270 • Higher rate: 40% on £50,271-£125,140 • Additional rate: 45% on income over £125,140 House of Commons Library+2growthcapitalventures.co.uk+2 | Where many get caught out. Rising into higher or additional rate means sudden leaps in tax payable. |
Scotland | If you live in Scotland, pay attention: thresholds/rates differ. | |
National Insurance (Class 1 for employees) | NI also contributes significantly to total deductions. Sometimes forgotten when people think only in terms of income tax. | |
Trading income/property (self-employment) | Many smaller landlords, freelancers may need to adjust accounting and record keeping now. |
Real-World Client Scenarios: Where People Are Getting Caught
Here are some anonymised but typical cases I’ve worked on recently (2023-25) that illustrate what can go wrong — and what to look out for in your own tax affairs.
Case | What happened | How it cost them / what the risk was |
Freelancer with a “side hustle” (Sarah from Bristol) | Sarah is a designer by day (employed) and sells artwork online in evenings & weekends via Etsy. Her side income was around £2,500/year. She didn’t report it, because she (incorrectly) thought the trading allowance (£1,000) meant nothing more needed. | HMRC’s data matching flagged sales via bank accounts. She had to back-declare two years, pay tax + interest + a penalty for late disclosure. If she had used her self-assessment and included savings/profit over expenses properly, she could’ve used trading/property allowances and possibly avoided penalty. |
Landlord with multiple incomes (James in Leeds) | Owns two rental properties (UK), has some foreign dividends & occasional consultancy work. He thought because rental income was modest, nothing much to do — just report it in Self Assessment. But he’d made several “expenses” claims that were borderline (e.g. personal travel between properties, mixed use), and didn’t keep digital or detailed records. Also some foreign income unreported.
| When HMRC audited (triggered by late Self Assessment), they disallowed several expense claims; penalties applied; interest charged. Because digital record keeping was poor, he couldn’t easily reconstruct receipts. The cost of correcting mistakes + the financial & admin burden far exceeded what better record-keeping earlier would have cost. |
Small business caught by threshold shifts (Priya from London) | Priya runs a small consultancy through Ltd Co., takes salary + dividends. Her salary rose slightly (inflation adjustment) pushing more dividends into higher rate band vs additional rate. She also lost portions of her personal allowance because her total adjusted net income crossed the £100,000 trigger, but she hadn’t realised. | She ended up paying more tax than she expected; cash flow shock. During planning, we recomputed her salary/dividend mix to stay just under one threshold, and maximised pension contributions to bring taxable income down in-year. |
What the “Raid” Likely Means for You
So: is HMRC planning something new and huge? Not in the sense of a sudden, unexpected tax hike for everyone. More accurately:
● They are expanding compliance, using better data, closing known loopholes, and forcing more people to digital record keeping under MTD.
● Those with multiple income sources, side hustles, rental property, or those nearing thresholds (higher rate / losing allowances) are especially exposed.
● If you leave things to the year‐end, keep sloppy records, or assume allowances will “stretch” indefinitely as income rises, you’ll likely overpay or get penalties.
What You Should Be Checking Now: Step-by-Step Verification
None of us loves tax surprises, but here’s how to avoid them. These are checks I run with every client when I suspect they might be near a choke point.
Checklist: Income & Tax Code Verification
Confirm all income sources
○ Employment salary(s) / PAYE <br> - Side hustle / freelance / gig income <br> - Property / rental income (UK and overseas) <br> - Savings interest & dividends <br> - Capital gains (if any) <br> - Pension & state pension income
Use bank statements, online platforms, P60/P45s. If any income is off the radar, HMRC likely has third-party data to flag mismatches.
Check your tax code
○ Standard code for most is 1257L for 2025-26. GOV.UK+1 <br> - Codes starting with BR, D0, D1, or K indicate special situations: additional tax on all income, deferred tax, etc. <br> - If you’ve changed jobs, had benefits, or your partner’s income changed, tax codes sometimes lag or mis-allocate allowances.
Figure out your marginal rate(s)
○ Know at what point you jump from 20% to 40%, and from 40% to 45% (including loss of personal allowance over £100,000). <br> - Also in Scotland the bands are different — if you live there, use the Scottish rates table.
Estimate your “qualifying income” for MTD ITSA (if self-employed or landlord)
○ Combine gross receipts (before expenses) from self-employment + UK property income. <br> - If this is going to exceed £50,000 in 2024-25 (and you file your return by 31 Jan 2026), HMRC will likely mandate MTD from April 2026. GOV.UK+1
Review your allowable expenses and reliefs
○ Travel, home-office, depreciation / capital allowances, pensions, ISA contributions etc. <br> - Make sure you’ve got receipts/digital record. <br> - For businesses / landlords: ensure mixed usage and private vs business use have been properly apportioned.
Check if you’re losing allowances or paying extra
○ Over £100,000 income? You’ll lose £1 of Personal Allowance for every £2 above £100,000. <br> - Dividends allow-ance, savings interest allowance have changed / reduced. Ensure you know current rates.
Prepare for the shift to digital (MTD for ITSA)
○ If affected: get software (or bookkeeper / accountant) set up now. <br> - Use the trial / voluntary early sign-up if available. <br> - Keep receipts digitally; classify income/expenses clearly by source.
HMRC Crackdown Statistics
How to Protect Yourself From HMRC’s Increased Scrutiny
Now, let’s think about your situation. If HMRC is upping its game with more checks and tighter rules, what can you do to stay one step ahead? Protection here isn’t about avoiding tax — it’s about paying the right amount, on time, with the right evidence. In my years working with everyone from gig workers to multi-director businesses, I’ve found most problems come from missing records, misunderstood allowances, and poor planning. So let’s get into the practical side.
Record-Keeping Is Your First Line of Defence
None of us loves paperwork, but here’s the truth: when HMRC questions a claim, the burden of proof is on you. I’ve seen otherwise sensible clients lose thousands because they couldn’t produce records.
● Digital Receipts: Keep every invoice, bill, and expense record. With MTD rolling out, paper boxes won’t cut it.
● Segregate Accounts: Use a separate business bank account for self-employment or landlord income. Mixing personal and business costs is where people trip up.
● Quarterly Reconciliation: Don’t leave it all for January. Reconcile
income/expenses every quarter — this also helps you budget for upcoming tax bills.
Case in point: Tom, a plumber from Birmingham, had £14,000 in allowable expenses but could only evidence £7,000 due to poor records. HMRC disallowed half, leaving him with a shock £2,800 extra tax bill plus late-payment interest.
What If Your Tax Code Looks Off?
Your tax code is like a postcode for your income — if it’s wrong, everything gets misdelivered. Over the years, I’ve noticed about one in ten new clients had incorrect codes.
● Look for “1257L” — that’s the default for 2025/26.
● Check adjustments: Company car, benefits in kind, unpaid tax from earlier years — these show up in codes.
● Multiple jobs: If you have two employers, HMRC often allocates your allowance entirely to one, taxing the other job at 20% or 40%.
If your code seems odd, use the HMRC tax code checker. In practice, I’ve had clients reclaim several thousand pounds simply because their code had carried forward an outdated company car benefit.
Using Allowances and Reliefs Before You Lose Them
Think of allowances as “use it or lose it” pots. If you don’t plan, you end up giving HMRC a tip you didn’t need to.
Personal Allowance & Higher Rate Trap
Between £100,000 and £125,140, your effective tax rate can reach 60% because you’re losing £1 of allowance for every £2 earned.
How to protect yourself:
● Make pension contributions — these reduce adjusted net income.
● Consider gift aid donations (charity donations can also extend allowances).
Example: Maria, a project manager in London, earned £112,000. Without planning, she would’ve lost most of her personal allowance. By contributing £8,000 gross into her pension, she saved £4,800 in tax — and boosted her retirement pot.
Dividend Allowance
For 2025/26, the Dividend Allowance remains £500 (drastically reduced from previous years). Many owner-directors miss this change and pay unexpected higher rate tax on dividends. If you rely on dividends, plan your salary/dividend mix carefully.
Savings Allowance
● Basic rate taxpayers: £1,000 tax-free savings interest
● Higher rate taxpayers: £500
● Additional rate taxpayers: £0
With interest rates higher than in the last decade, many now exceed these limits without realising. I’ve seen clients shocked by tax bills on ISAs they thought were “all savings” — only ISAs are tax-free, not regular bank accounts.
Self-Employed and Landlords: Special Watchpoints
Now, if you’re running your own business or renting property, you’re in HMRC’s crosshairs for the coming MTD rollout.
Deducting Expenses the Right Way
Be careful here, because I’ve seen clients trip up when they try to “stretch” business expenses. The classic red flags:
● Claiming all household bills as “home office” instead of apportioned use
● Personal car use written off entirely as “business mileage”
● Repairs vs. improvements: replacing a broken boiler = deductible, adding an extension = capital improvement (not immediately deductible)
A case that sticks in my mind: Naveed, a landlord in Leicester, claimed the full cost of new fitted kitchens in two flats as repairs. HMRC reclassified as capital expenditure, disallowed the deductions, and added penalties. If he’d planned properly, he could’ve offset costs against eventual capital gains instead of being hit immediately.
Multiple Income Sources
If you’re juggling employment, self-employment, and rental income, your Self Assessment is where it all merges. Don’t assume each source is taxed correctly in isolation. I recommend running a single spreadsheet that lists all income streams by month — it highlights if you’re about to cross a band or lose allowances.
Spotting Overpayments and Refund Opportunities
It’s not all about defence — sometimes you’re due money back. Here’s where I’ve seen refunds hiding:
● Job changes or multiple jobs: PAYE often over-deducts tax mid-year.
● Redundancy payments: The taxable portion can be miscalculated if processed incorrectly.
● Pension contributions: Higher-rate relief sometimes isn’t automatically applied; you must claim via Self Assessment.
● Marriage Allowance: If one spouse earns below £12,570 and the other is a basic-rate taxpayer, transferring £1,260 of allowance saves up to £252/year.
Example: Claire and Ben from Cardiff. Ben earned £28,000, Claire only £8,000. They hadn’t applied for Marriage Allowance. We back-dated claims four years, netting them nearly £1,000 in refunds.
Step-by-Step: Preparing for MTD ITSA
If you’re self-employed or a landlord, here’s how to get ready now for the April 2026 start.
Check if you’ll be caught — gross business/property income > £50,000.
Choose MTD software — HMRC maintains a list of compatible tools. Don’t leave it to the last minute.
Digitise your records — start scanning receipts, keeping income/expenses logged digitally.
Quarterly discipline — practise submitting quarterly numbers voluntarily now, so April 2026 isn’t a shock.
Work with your accountant — ensure expense categories align with HMRC rules.
Think of it like learning to drive before the test — practising early means far fewer nerves when it’s compulsory.
Why Small Errors Now Mean Big Trouble Later
With HMRC’s systems becoming more data-driven, even small inconsistencies can trigger questions. I’ve seen letters land for £200 discrepancies — because the algorithms spot mismatches instantly.
Where do mismatches usually arise?
● Bank interest reported by banks vs. what you filed
● Gig economy platforms reporting income directly to HMRC
● Benefits in kind values from employers not matching employee returns
● Foreign income (often forgotten) now increasingly reported via international agreements
The bottom line: assume HMRC already knows more about your income than you think. Your protection is ensuring your records match what HMRC will see.
Advanced Protection Strategies for Business Owners and High Earners
So, the big question on your mind might be: what if you’re not just a salaried worker or a small landlord, but running a company, juggling investments, or earning enough to fall into the extra “tax traps”? That’s where strategy matters most. From high-income child benefit charges to dividend planning, I’ve seen clients save or lose thousands depending on their preparation.
High-Income Child Benefit Charge: The Silent Clawback
This one catches people off guard more than almost anything else. If either you or your partner earns over £50,000, you may have to repay some (or all) of any child benefit received.
● At £50,000–£60,000, you repay a portion.
● At £60,000+, you repay the whole lot via Self Assessment.
Example: David and Emma from Newcastle. Emma earned £48,000, David £56,000. They claimed child benefit for two children. David assumed Emma’s lower salary meant no clawback. Wrong. Because the higher earner’s income is what matters, HMRC demanded repayment of nearly £1,900 across two years.
Protection step: If you’re near the £50,000 threshold, consider pension contributions or salary sacrifice to keep adjusted net income below it. I’ve seen clients save child benefit worth thousands just by timing pension top-ups.
Company Directors: Salary vs Dividend Mix
If you’re running your own company, this decision shapes your take-home pay — and HMRC knows it’s a common area for mistakes.
● Salary is subject to income tax + National Insurance (both employee and employer).
● Dividends are subject to dividend tax but no NIC.
But from 2025/26, with the dividend allowance cut to £500, the dividend strategy has narrowed.
Example: Priya, a London consultant (mentioned earlier) adjusted her mix when her rising salary pushed dividends into higher rate tax. By recalculating her director’s salary at just below the NI threshold and paying more into her pension, we reduced her overall tax liability while preserving her personal allowance.
Protection step: Review your salary/dividend mix annually — don’t assume last year’s split is still optimal.
Business Expense Planning: Avoiding the “Grey Zone”
Business owners often ask me: “What can I actually put through the company without HMRC knocking?” The answer: wholly, exclusively, and necessarily for the trade. The phrase is simple, but practice is messy.
Safe expenses:
● Professional insurance
● Equipment used solely for business
● Travel to client sites
● Staff training
Grey zone expenses:
● Home internet and utilities (apportion carefully)
● Meals (only deductible if travelling for work, not routine lunches)
● Cars (private vs. business use must be crystal clear)
Case study: Linda, who ran a design studio in Sheffield, tried to deduct 100% of her home utility bills. HMRC disallowed most, charging extra tax and penalties. If she had apportioned realistically (say, 20% business use), she would’ve saved what was fair — and avoided risk.
Rare Cases: Emergency Tax and Coding Errors
I’ve had countless calls starting: “Why has my payslip taxed me nearly half my salary this month?” The culprit is usually emergency tax codes (often when starting a new job).
These use a “Month 1” basis, ignoring earlier earnings, so they tax as if every month is your first.
● How to fix it: Check your P45/P60, ensure your new employer submits it promptly, and monitor your tax code on your personal tax account. Refunds usually come automatically, but only if codes are corrected swiftly.
Real-world cost: Mark, a nurse in Leeds, was on an emergency code for three months. He eventually got £1,200 refunded, but only after six months of chasing.
Protecting Against Underpayments: PAYE and Side Income
If you earn via PAYE but also have side income, HMRC sometimes adjusts your tax code to “collect” tax on the side income. Sounds neat, but it can be messy.
● If your side income is underestimated, you’ll underpay and face a lump sum bill later.
● If it’s overestimated, you’ll overpay and wait months for a refund.
Protection step: I recommend filing Self Assessment rather than relying solely on PAYE coding adjustments if you have multiple income streams. It gives you more control — and keeps all numbers visible.
Pension Contributions: A Legal Tax Shield
Pensions remain one of the few robust, government-blessed ways to reduce your tax bill. Every year I remind clients: you get relief at your highest marginal rate.
● Annual allowance: £60,000 for 2025/26 (tapered if income exceeds £260,000).
● Carry forward: Unused allowances from the past three years may still be usable.
Case in practice: Hassan, a senior IT contractor earning £140,000, boosted his pension by £20,000, saving 45% tax on that slice — that’s £9,000 saved instantly, plus growth in his pension pot.
Capital Gains and Property Owners
Landlords and investors must watch capital gains carefully. The Capital Gains Tax (CGT) annual exempt amount is just £3,000 for 2025/26. Gone are the days when you could realise £12,000+ tax-free.
● Residential property: 18% (basic rate band) or 28% (higher/additional).
● Other assets: 10% or 20%.
Example: Alice from Bristol sold a second flat in 2024/25. She assumed her £12,300 exemption still applied. Wrong — the allowance had been slashed. She ended up paying nearly £7,000 more than expected.
Protection step: Time disposals across multiple tax years, use spousal transfers, or offset with genuine capital losses.
Navigating Increased HMRC Scrutiny: A Practical Risk Advisory for 2025 and Beyond
1. The New Landscape of Tax Compliance: Why Scrutiny is Intensifying
As mentioned above, a fundamental shift is underway in HMRC's approach to tax compliance. This is not a temporary campaign; it is a structural transformation of the enforcement landscape, driven by a mandate to close a significant tax gap and augmented by powerful new technologies. For business owners, landlords, and the self-employed, the critical takeaway is that HMRC's tolerance for error has evaporated. Facing a system described as "creaking," the response has been to invest in AI, big data, and a surge of new compliance staff, creating a new reality where a "prosecute first, ask questions later" mentality appears to be taking hold. Proactive compliance is no longer best practice—it is an essential component of risk management.
The core drivers of this intensified scrutiny are clear, and their implications are direct:
The £39.8 Billion Tax Gap: In the 2022/23 tax year, the gulf between tax owed and tax collected was a staggering £39.8 billion. HMRC is under immense pressure to close this gap, with enforcement as its primary tool. This translates to a lower tolerance for discrepancies and a more aggressive pursuit of perceived non-compliance across all taxpayer categories.
Significant Investment in Enforcement: The government is channelling substantial resources into HMRC's operational capacity, funding an additional 5,500 compliance staff and 2,400 debt-management colleagues. This increased manpower means more audits, more compliance checks, and a wider investigatory net capable of reaching smaller businesses and individuals who may have previously remained under the radar.
Technological Advancement: HMRC's capabilities have been supercharged by technology. Its sophisticated "Connect" system deploys AI, big data, and machine learning to cross-reference billions of data points from third-party sources, including banks, digital sales platforms, and government agencies. This automated data matching means even minor discrepancies can now automatically trigger an investigation.
This combination of motive, resources, and technology is fundamentally altering the environment for every taxpayer, making it imperative to understand the specific mechanisms being implemented.
2. The Twin Engines of Enforcement: Making Tax Digital and Fiscal Drag
Beyond hiring more staff, HMRC is deploying two powerful, systemic changes that fundamentally alter tax reporting and liability for millions: Making Tax Digital (MTD) and the prolonged freezing of tax allowances, a phenomenon known as "fiscal drag." These twin engines work in concert to increase both HMRC's visibility into taxpayer finances and the tax burden on individuals and businesses.
2.1. Making Tax Digital (MTD) for ITSA: The End of Year-End Reporting
Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) represents the most significant structural change to tax administration in a generation. It replaces the traditional annual Self Assessment tax return with a requirement to maintain digital records and provide quarterly updates of income and expenses to HMRC using compatible software.
The rollout is staged, bringing more taxpayers into the system over the next few years:
Effective Date | Who is Affected (Gross Business/Property Income) |
From 6 April 2026 | Self-employed individuals and landlords with income over £50,000 |
From April 2027 | Threshold lowers to £30,000 |
From April 2028 | Threshold lowers to £20,000 |
The practical implication of MTD is profound. It provides HMRC with near real-time visibility into your business finances, eliminating the traditional year-end process of collating records and resolving issues. Points of failure in record-keeping can no longer be corrected quietly before a single annual filing; they will be visible to HMRC quarterly, making meticulous, ongoing financial discipline non-negotiable.
2.2. Fiscal Drag: The "Stealth Tax" Impact
Fiscal drag is a subtle but powerful force that increases tax revenue without overt policy changes. It occurs when tax-free allowances and income tax thresholds are frozen while incomes rise with inflation. As earnings increase, individuals are automatically pushed into higher tax brackets, silently increasing their overall tax liability.
The government has confirmed that key thresholds will remain frozen until April 2028, including:
The Personal Allowance: Fixed at £12,570.
The Higher Rate Threshold: Fixed at £50,271.
The impact of fiscal drag is significant. More of your income becomes taxable, and more of it is taxed at a higher rate. It also makes it far easier to cross critical income thresholds that trigger the loss of allowances, such as the tapering of the personal allowance for those with an adjusted net income over £100,000. This requires far more diligent cash flow planning to avoid unexpected and unwelcome tax liabilities.
These systemic changes provide HMRC with unprecedented insight and automatically increase the tax take, creating a powerful backdrop for its targeted enforcement activities.
3. HMRC's Enforcement Focus: High-Risk Sectors and Activities
Armed with enhanced resources and data analytics, HMRC is directing its focus toward specific sectors and activities where it believes the risk of non-compliance is highest. Understanding whether your business or income sources fall into one of these categories is the first step in assessing your personal risk level and building a resilient compliance framework.
3.1. Self-Employment and IR35 Status
HMRC is engaged in an ongoing crackdown on the employment status of contractors and freelancers. High-profile court cases involving TV presenters and sports stars are being used to establish legal precedents and send a clear message: misclassifying employment as self-employment to reduce tax liabilities will be challenged aggressively. Consequently, a rigorous review of your IR35 status, contracts, and working practices is not just advisable—it is an urgent necessity.
3.2. The Digital and "Side Hustle" Economy
New rules require digital platforms like eBay, Uber, and Etsy to automatically report user earnings to HMRC when an individual earns more than £1,700 or completes 30 or more sales in a year. While the £1,000 tax-free trading income allowance is available, income between £1,000 and £3,000 can be declared online, but any income exceeding £3,000 requires a full self-assessment return. The assumption that small side-hustle profits can be ignored is now a high-risk strategy.
3.3. Landlords and Property Income
Landlords are a key group impacted by the MTD rollout. HMRC perceives a significant tax gap in this sector, often stemming from poor record-keeping for expenses and the incorrect classification of capital improvements (e.g., a new extension) as immediately deductible repairs (e.g., fixing a broken window). Landlords must maintain meticulous digital records and clearly understand the distinction between allowable revenue expenses and capital costs to avoid having claims disallowed during an inquiry.
3.4. Cash-Intensive Businesses
Businesses that frequently deal in cash are a perennial focus for HMRC due to the risk of under-reported income. This includes sectors such as car washing services, pet sales, waste management, and hospitality. With new licensing requirements being explored for some of these areas, maintaining accurate, verifiable financial records and declaring all income is an absolute necessity.
3.5. Construction Sector and CIS
The Construction Industry Scheme (CIS) is a major area of HMRC scrutiny. Compliance failures related to the verification of subcontractors and the correct application of deduction rates (0%, 20%, or 30%) are common points of failure. Both contractors and subcontractors are at high risk of investigation if their records and reported deductions do not align perfectly with HMRC's data.
3.6. Research and Development (R&D) Tax Relief
Amid concerns that R&D tax relief fraud and errors are costing the UK over £4 billion annually, HMRC has dramatically increased its enforcement activity. Investigation rates have soared from approximately 1 in 100 claims to 1 in 5. Any business claiming R&D relief must now expect a higher likelihood of scrutiny and be prepared with immaculate project records and a detailed breakdown of qualifying expenditures.
3.7. Code of Practice 9 (COP 9) Investigations
HMRC is increasing its use of Code of Practice 9 investigations for cases of suspected serious tax fraud. COP 9 offers immunity from criminal prosecution in exchange for a full and complete disclosure of all tax irregularities. This approach allows HMRC to secure significant tax revenues without the cost of criminal proceedings, signalling a hard-edged approach to tackling deliberate non-compliance.
3.8. National Minimum Wage Compliance
Compliance with National Minimum Wage regulations is another key focus. HMRC is actively investigating misclassification of employees and failures to pay correct wage rates. Businesses found to be non-compliant face not only significant financial penalties but also severe reputational damage.
4. Case Studies in Compliance Failure: Quantifying the Impact
Theoretical risks become real-world liabilities when taxpayers make common, often unintentional, errors. The following anonymised case studies, drawn from real-world scenarios, illustrate the most frequent points of failure and their tangible financial consequences.
Case Study: The "Side Hustle" Seller Sarah, a designer employed full-time, earned approximately £2,500 per year selling her artwork online.
Mistake: She incorrectly assumed the £1,000 trading allowance meant she did not have to report her earnings at all. She failed to register for Self Assessment or declare the £1,500 of taxable profit.
Consequence: HMRC's automated data matching with the digital platform flagged her sales. Sarah was required to back-declare two years of income, paying the outstanding tax along with interest and a penalty for late disclosure.
Case Study: The Landlord with Mixed Records James owned two rental properties and had other income sources, including occasional consultancy work and foreign dividends.
Mistake: He kept poor digital records, making it difficult to substantiate expenses. He claimed several borderline expenses, such as personal travel costs, and failed to report a small amount of foreign income.
Consequence: A late Self Assessment filing triggered a wider audit. HMRC disallowed multiple expense claims due to a lack of evidence, leading to a higher tax bill. He faced penalties for the inaccurate return and interest charges on the unpaid tax.
Case Study: The Small Business Owner Caught by Thresholds Priya runs her consultancy through a limited company, taking a small salary and regular dividends.
Mistake: A modest annual salary increase, combined with her dividend income, pushed her "adjusted net income" over the £100,000 threshold without her realising the specific tax implications.
Consequence: She began to lose her tax-free £12,570 personal allowance at a rate of £1 for every £2 earned over the threshold. This created a high effective tax rate on that slice of income and resulted in an unexpected and significant tax bill, causing a cash flow shock.
These examples underscore a crucial point: these costly compliance failures are almost always avoidable with proactive awareness and meticulous financial management.
5. Your Proactive Defence: An Actionable Compliance Checklist
Protection from HMRC scrutiny is not about clever tax avoidance; it is about demonstrating meticulous compliance and engaging in smart, forward-looking planning. This checklist provides a step-by-step guide to fortifying your financial affairs against the risk of an investigation.
5.1. Foundational Record-Keeping: Your First Line of Defence
Your records are the primary evidence you will rely on in an inquiry. They must be unassailable.
Go Digital: Paper records are no longer sufficient. Use MTD-compliant software or a dedicated app to keep digital copies of every invoice and receipt. This is best practice now and will be mandatory for many soon.
Segregate Accounts: Always use a separate bank account for your business or rental property. Mixing personal and business transactions is a major red flag for HMRC and makes substantiating expense claims extremely difficult.
Reconcile Quarterly: Do not wait until the filing deadline to review your finances. Reconcile your income and expenses every three months. This aligns with the MTD framework and prevents a year-end panic, reducing the risk of errors.
5.2. Verifying Your Income and Tax Code
An accurate tax return starts with accurate data. Verify your position annually.
Confirm All Income Sources: Compile a comprehensive list of every income stream: PAYE salary, freelance work, property rent, savings interest, and dividends. Assume HMRC has third-party data on most of them; any omission will be flagged.
Check Your Tax Code: The standard tax code for most employees in 2025-26 is 1257L. If your code is different (e.g., BR, D0, K), investigate why. It could indicate an error that is causing you to over or underpay tax.
Know Your Marginal Tax Rate: Identify the precise income points where you will move into the 40% higher rate band (£50,271) and the 45% additional rate band (£125,140). (Note: rates and bands differ for Scottish taxpayers, who have a top rate of 48%). This knowledge is critical for effective tax planning.
5.3. Preparing for Making Tax Digital (MTD)
For landlords and the self-employed, MTD is not a distant concept; it is an impending requirement.
Confirm Your Status: Calculate your total gross income from self-employment and/or property. If it is likely to exceed the £50,000 threshold, you must prepare for the April 2026 start date.
Choose Compliant Software: Do not delay this decision. Review HMRC's official list of compatible software providers now and select a product that fits your business needs.
Start Practicing: Begin keeping fully digital records and running quarterly reconciliations immediately. Building this discipline now will make the mandatory transition seamless.
These foundational steps build a robust compliance framework, moving you from a reactive to a proactive position.
6. Advanced Protection Strategies for High Earners and Business Owners
For individuals with higher or more complex incomes, basic compliance is simply the starting point. Strategic planning is essential to manage liability legally and navigate the numerous "tax traps" that exist for higher earners.
6.1. The High-Income Child Benefit Charge
This is one of the most common and costly points of failure for families. If one partner has an "adjusted net income" over £50,000, the household's child benefit is progressively clawed back, with 100% repayment required once income reaches £60,000.
Protection Strategy: You can legally reduce your adjusted net income to remain below these thresholds. Making personal pension contributions or entering into a salary sacrifice arrangement with your employer are highly effective methods to preserve your child benefit entitlement.
6.2. Company Directors: Optimising the Salary vs. Dividend Mix
The traditional "low salary, high dividend" remuneration strategy for company directors requires constant review. With the tax-free Dividend Allowance now only £500, the calculations have changed significantly. A dividend strategy that was efficient last year may now be suboptimal, potentially pushing income into a higher tax band unexpectedly.
Protection Strategy: Conduct an annual review of your salary vs. dividend split with your advisor. The optimal mix now requires a careful calculation to balance income tax, National Insurance, and dividend tax rates, ensuring it remains the most tax-efficient structure.
6.3. Pensions: The Premier Tax Shield
Pension contributions remain the most effective, government-endorsed tool for legally reducing your taxable income. You receive tax relief on contributions at your highest marginal rate (e.g., a 40% taxpayer receives £100 in their pension for a net cost of £60).
Protection Strategy: Maximise your allowances. The standard annual pension allowance for 2025/26 is £60,000. Furthermore, you can "carry forward" any unused allowance from the previous three tax years. This can be a powerful tool for reducing a large one-off income receipt or bringing your income below critical thresholds like £100,000 (to protect your personal allowance) or £50,000 (to protect child benefit).
7. From Risk to Resilience
HMRC's intensified compliance drive represents a permanent and structural shift in the UK's tax landscape. This is a new, more hostile enforcement environment where the era of benign neglect for minor errors or un-digitised records is over. Powered by AI-driven data analytics and a clear mandate to close the tax gap, HMRC's scrutiny will only continue to grow.
In this climate, resilience is not achieved through complex avoidance schemes. It demands a disciplined and proactive approach to risk management centred on three core actions: maintain meticulous digital records, understand your specific risk areas, and engage in proactive annual tax planning.
This advisory provides a clear framework for building that resilience. However, the most effective way to ensure full compliance and protect your financial future is to seek personalised professional advice tailored to your unique circumstances.
Final Checklist: Staying Ahead of HMRC
Before wrapping up, here’s a straightforward 10-point summary of what matters most.
Summary of Key Points
HMRC isn’t “raiding” with sudden new taxes — but frozen thresholds, MTD, and compliance checks mean more people will pay more tax.
The real risk is fiscal drag and penalties for sloppy reporting.
Know your 2025/26 bands and allowances — personal allowance £12,570, higher rate from £50,271, additional rate from £125,140 (different in Scotland).
Check your tax code every year — wrong codes lead to underpayments or overpayments, often unnoticed for years.
Keep digital records now — don’t wait until MTD becomes mandatory in 2026. Start scanning receipts and using accounting software.
Plan for child benefit clawback if earning over £50,000 — pensions and gift aid can reduce “adjusted net income.”
Review salary/dividend mix annually — the £500 dividend allowance makes last year’s plan outdated for many directors.
Avoid grey-zone expense claims — apportion home and car costs fairly; HMRC disallows overclaims harshly.
Spot refund opportunities — Marriage Allowance, job changes, emergency tax codes, or pension contribution reliefs.
Use pensions strategically — relief at your highest rate, with carry forward rules, remains one of the best legal shields.
Stay proactive with capital gains — the allowance is only £3,000; plan disposals across years and use spouse exemptions.
FAQs
Q1: How can someone quickly check whether they are registered under the Construction Industry Scheme (CIS)?
A1: The quickest route is to sign in to HMRC’s CIS online service and enter your details — that will show whether HMRC recognises you as a subcontractor, whether you’re registered for gross payments, and what deduction rate applies. If you can’t access the service, ring the CIS helpline with your UTR and National Insurance and ask them to confirm. In my experience, subcontractors who try the online check first sort most questions within 10–15 minutes; the helpline is useful if there’s a mismatch between what HMRC has and what your contractor assumes.
Q2: Can someone change their CIS status if it’s incorrect on HMRC’s system?
A2: Yes — but there are two routes depending on the problem. If HMRC shows you as registered but you should be on a different deduction rate (or gross), you can ask HMRC to update their record and provide supporting documents. If you’re not registered but should be, you register as a subcontractor (or contractor if relevant). From practice, the common snag is missing paperwork: HMRC will normally ask for proof of identity, business bank details, and UTR. Be prepared; I once had a joiner from Bristol lose two weeks of potential gross payments simply because his UTR wasn’t recorded correctly.
Q3: What should a subcontractor do if a contractor says they won’t verify them for CIS?
A3: First, don’t pay out of pocket. Ask the contractor to explain why — sometimes it’s an admin oversight. If a contractor refuses to verify, they may be non-compliant; you can contact HMRC and ask for guidance. Keep written records of the contractor’s refusal (emails/texts). From working with clients, the most practical solution is to ask for a short delay until HMRC can verify; if the contractor still refuses, escalate to HMRC — you’ll want that evidence in case of later disputes over deductions or payments.
Q4: How does someone check what deduction rate (20%, 30%, or gross) is being applied to them?
A4: HMRC’s verification response (online or by phone) will state the deduction rate to be used. Contractors should also see the rate when they verify you through their CIS online account. Note: a “gross” status means no deductions; basic (20%) or higher (30%) deduction rates apply otherwise. A practical tip: screenshot or save the verification confirmation — I’ve had clients win disputes because they had a saved verification showing gross status that the contractor later failed to respect.
Q5: If a subcontractor is paid through a limited company, how can they check CIS status for the company?
A5: Limited companies can be registered as subcontractors for CIS — but HMRC treats corporate entities differently. Use the company’s registration number and UTR when verifying via HMRC; the online check will confirm whether the company is registered and the applicable rate. I’ve seen confusion when directors assume their personal UTR applies — it doesn’t. Always verify the entity that is paid.
Q6: What records should someone keep to prove CIS deductions or gross status if HMRC queries them later?
A6: Keep: payment schedules, CIS verification confirmations (screenshots or printouts), payslips/invoices, bank statements showing contractor payments and any deduction amounts, and copies of monthly CIS statements from contractors. In practice, I recommend a simple folder (digital or physical) sorted by contractor and month; one client avoided a large penalty because they could show contractor monthly statements precisely matching their bank entries.
Q7: How can someone check if their contractor has reported CIS deductions correctly to HMRC?
A7: Your contractor must give you a monthly CIS statement showing your pay and deductions — compare that to the contractor’s CIS monthly return figures (if you can obtain them) and your bank payments. If there’s a mismatch, ask the contractor to correct it; if they won’t, contact HMRC. A common red flag I encounter: subcontractors who see lower figures on their HMRC personal tax account than the contractor’s statements — often due to the contractor not including certain payments on their return.
Q8: Is there a way to check CIS status or deductions through one’s personal tax account?
A8: Yes. Your personal tax account may show payments received and CIS deductions credited against your Self Assessment records. However, it doesn’t replace a contractor’s monthly statement. Use it as a cross-check: if HMRC’s records show lower gross pay or deductions than your records, act quickly — discrepancies can affect your tax bill or refunds later.
Q9: What steps should someone take if they think they’ve been taxed under CIS but were actually an employee?
A9: That’s an employment status issue, not just a CIS check. Collect contracts, payslips, day-to-day working arrangements evidence (who controls work, provides tools, etc.). You can ask HMRC for an employment status check or raise the issue via Self Assessment and include a note and evidence. From experience, construction workers who were incorrectly treated as subcontractors sometimes reclaim underpaid employment rights and correct PAYE treatment — but it can be a lengthy process, so act early.
Q10: How should someone verify CIS status for subcontractors they’ve not used in the last two tax years?
A10: Contractors must verify any subcontractor they have not paid under CIS in the current or previous two tax years before making a first payment. Use the CIS verification online tool and input the subcontractor’s details; if the subcontractor hasn’t been active, HMRC may require fresh verification information. In practice, firms that reengage seasonal workers often forget this and risk penalties — schedule verification as part of rehiring admin.
Q11: Can someone check whether they’re eligible for gross payment status, and what’s the best way to apply?
A11: You check eligibility via HMRC guidance and by applying as a subcontractor for gross payment status — you’ll need to demonstrate a clean compliance history (tax filings, returns, NI, etc.). The online application or helpline will advise. I’ve found that smaller firms aiming for gross status should tidy up outstanding returns and NICs first; HMRC judges applications on recent compliance, so get those ducks in a row.
Q12: What happens if a contractor applies the wrong CIS rate and how can a subcontractor get the difference back?
A12: If a contractor deducted too much, the subcontractor should first ask the contractor to correct it on their monthly CIS return or provide the over-deduction back directly. If the contractor won’t or the error remains, the subcontractor can claim the overpayment via Self Assessment or ask HMRC to correct records. In real cases, persistence wins: one roofer reclaimed several hundred pounds after showing bank statements and contractor promises that were ignored.
Q13: How should someone verify their CIS status when working across multiple regions or for public sector contractors?
A13: Verification is the same process, but public sector or large regional contractors often have stricter onboarding checks. Always verify each subcontractor engagement separately; if you work for several contractors in different regions, verify with each in case their payroll systems apply different practices. One plasterer I worked with had different deduction practices between two councils — verifying each engagement prevented him being underpaid on net receipts.
Q14: Can a subcontractor check whether CIS deductions have been credited to their Self Assessment record?
A14: Yes — when you file or view your Self Assessment or personal tax account, CIS deductions reported by contractors should appear as payments or credits. If amounts are missing, reconcile with contractor statements and pursue correction. I recommend doing this reconciliation annually; a client of mine spotted a missing £1,200 deduction credit that, once corrected, significantly reduced their end-of-year tax bill.
Q15: What should a contractor check when verifying a subcontractor for the first time?
A15: Contractors should confirm the subcontractor’s UTR, name, and whether they’re registered for CIS or eligible for gross status; verify via HMRC before the first payment. Keep evidence of the verification (reference number or screenshot). From running audits, contractors who document verification properly avoid penalties and disputes downstream.
Q16: How does VAT registration affect CIS status checks and deductions?
A16: VAT registration doesn’t change CIS status; CIS is about income tax/NIC deductions. But it affects invoicing and net amounts paid. Ensure both parties understand whether payments are gross of VAT and separately show CIS deductions. I’ve seen subcontractors assume VAT and CIS interplay reduces their net take without accounting for the VAT refund flow — clear invoices prevent surprise shortfalls.
Q17: If a subcontractor moves from being self-employed to employed by a contractor, how does that change what to check?
A17: Check that the contractor stops treating you under CIS and instead sets you up on PAYE with the correct employment paperwork. Verify final CIS-reported payments and deductions and obtain a P45 or similar from the contractor. In practice, mistakes happen during transitions; request written confirmation of the change in status to use if HMRC queries arise.
Q18: How can someone troubleshoot when HMRC’s CIS verification says “record not found” for a subcontractor who believes they are registered?
A18: First, double-check the details (spelling, UTR vs NI). If still “not found”, contact HMRC — sometimes registrations haven’t propagated or the subcontractor used a different UTR. Keep proof of attempts to verify. I once had a plasterer whose registration used an old trading name; a quick phone call sorted it once we supplied the correct UTR.
About the Author:
Adil Akhtar, ACMA, CGMA, serves as CEO and Chief Accountant at Pro Tax Accountant, bringing over 18 years of expertise in tackling intricate tax issues. As a respected tax blog writer, Adil has spent more than three years delivering clear, practical advice to UK taxpayers. He also leads Advantax Accountants, combining technical expertise with a passion for simplifying complex financial concepts, establishing himself as a trusted voice in tax education.
Email: adilacma@icloud.com
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