Business Matters – Issue 41

7 common tax blunders

1. Not understanding your tax obligations

Tax miscalculations can be costly. Underestimating profits can result in fines for non-compliance with HMRC rules, while missing deadlines can result in interest for overdue payments.

What’s more, failing to set aside enough funds for your tax liability can disrupt cash flow at crucial times of the year. National Insurance contributions hit the headlines recently, with the government increasing employer contributions from 13.8% to 15% from April 2025, as well as dropping the threshold at which employers start to pay National Insurance from £9,100 to £5,000.

What taxes do business owners need to pay?

Any business is taxed on its profits so the more you make, the more you may pay. The taxes you may need to consider include:

• Corporation Tax
• VAT
• Capital Gains Tax
• Business Asset Disposal Relief
• Income tax for salary
• Income tax for dividends
• Employee National Insurance contributions (NICs)
• Employers’ NICs.

The amount of tax you pay is governed by statute and based on how your business is structured and how you pay yourself and others.

2. Tax avoidance

We won’t give this one too much page space – but it certainly earns a spot on the list. In short, just don’t do it!

Example 1:

A retail company was accused of using aggressive tax avoidance schemes. They were found to have set up a system that allowed them to avoid paying UK tax by shifting profits to offshore jurisdictions and were therefore required to pay a significant sum in back taxes and penalties. The company later collapsed into administration.

3. Not keeping clear records

Accurate record-keeping is vital for any business, offering key financial insights, supporting tax returns and forming the foundation of audits. Clear, up-to-date records should track all income, expenses and financial transactions, including dates, invoices and supplier details.

But it’s not just about ensuring you’re meeting your tax obligations; maintaining meticulous records can also highlight opportunities.

Example 2:

Another retail company has faced multiple controversies regarding tax planning, particularly in relation to how they classified workers as ‘self-employed’ when they were actually working as regular employees. This allowed them to avoid paying National Insurance and other taxes. After an investigation by HMRC, the company was ordered to pay back unpaid taxes and National Insurance contributions.

4. Confusing personal and business finances

Not keeping your personal and business finances separate can  cause confusion, result in errors and ultimately risk tax liabilities. For example, you need to be careful about how you pay yourself and avoid using company money for personal expenses, which HMRC treats as a director’s loan.

Establishing dedicated accounts for personal and business finances is a best practice, particularly for maintaining clear tax records. This separation also simplifies asset management and strengthens financial oversight, helping to keep your business running efficiently and compliantly.

5. Not paying yourself or your team in a tax-efficient way

Not paying yourself or your team in a tax-efficient way can mean missing out on valuable deductions and incentives that could otherwise be reinvested into the business. Poor tax planning can result in higher tax liabilities and cash flow issues and can also impact employee morale.

If you set up a limited company, it’s important to think about your remuneration structure – how you pay yourself and any staff. This is the salary versus dividend question. If you have a very profitable year, you could choose to pay more dividends, as well as or instead of bigger bonuses. But with recent changes to the rate of Corporation Tax, the increase in Dividend Tax and the reduction of the Dividend Allowance, you might decide on a fixed salary structure.

Incorporating pension contributions into your remuneration structure is also an important part of creating tax-efficient drawings. On that topic…

6. Not maximising your pension contributions

Pension contributions are an important consideration for tax deduction, both for retirement planning and tax efficiency. For sole traders and partners, personal pension contributions are eligible for tax relief at their highest rate of income tax. Employer contributions are highly tax efficient since they are generally an allowance expense for corporation tax and not a benefit in kind for the employee.

Under the auto-enrolment regulations, all eligible employees must be part of a pension scheme (unless they choose to opt out). As their employer, you must contribute a minimum of 3% of their salary – with a ceiling of 8% for combined employer and employee contributions. But as a business owner, you have the freedom to put more in if you wish.

Pension contributions are an attractive benefit and for the business owner, you’re also moving money out of your business. So, if the business falters or fails, you have less capital at risk.

Once the money is out of the business and in a personal pension, it’s in your name and separate from the business.

The value of a pension  will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.  You may get back less than you invested.

Example 3:

A department store collapsed, partly due to poor pension planning and failure to seek proper advice about its large pension deficit. There were also issues with financial management that, while not directly tax-related, had tax consequences.

7. Not knowing what you can claim and what you can’t

And last but certainly not least, have you thought about what business tax allowances you might be eligible for? Here are three to consider:

• A Capital Allowance is where you offset the costs of buying assets for the company against your Corporation Tax liability. This allowance is particularly valuable during the early years, when you may be scaling up and investing in both people and plant, such as IT equipment, office furniture, storage facilities or plant and machinery.
• Sole traders, entrepreneurs or businesses running from home can also potentially claim a percentage of household bills as business expenses if trading from home. This needs to be approached with caution, consideration and sound advice.
• Research and Development tax credits are often overlooked. You may be eligible for a tax break when researching or developing new products or services. Any expenses you incur could be eligible for a cash payment or a reduction on your Corporation Tax. These can be complex, so to know if your innovation qualifies, speak to your accountant.

Example 4: Carillion

While not directly linked to tax allowances, we wonder whether better use of allowances and reliefs could have helped Carillion, which went into much-publicised liquidation in 2018. The major UK construction company was involved in large public-sector projects. Its failure is often cited as a case of corporate mismanagement and a reliance on risky contracts, but poor financial practices – including unpaid tax and pension obligations – were also a factor.

Spotlight on start-ups

Tax planning can feel like a low priority for new business owners, as you understandably focus on getting sales and operations off the ground. But optimising your tax position is just as valuable in a start-up as it is in larger organisations, as it can help you build a solid foundation for your new business.

Tax to-do list for start-ups

• Appoint an accountant and financial adviser: There’s much more to tax planning in a start-up than you may realise, especially if you’ve never run a company before. It’s a specialised area, and many businesses invest in professionally qualified advice.
• Choose what trading structure you’ll have: Decide on whether being sole trader, a partnership, a limited liability partnership or a limited company is most suited to your business.
• Make sure you understand all your tax obligations: Your chosen business structure is a key factor in this, so think carefully as it can be difficult to change later. It’s also important to decide whether you want to be registered for VAT and, if so, which VAT scheme to use.
• Register with HMRC for each tax you need to pay: There is no one-stop shop for this, so you must register separately for Income Tax, PAYE, VAT and (for limited companies) Corporation Tax.
• Self-employed accounting: If you’re self-employed, decide whether to use cash or accrual accounting to calculate your business profits subject to Income Tax. This decision can affect your cash flow significantly.

Smarter tax planning for business owners

These seven sins of tax planning are designed to highlight the negatives, but they also show how a well-structured tax strategy can help your company thrive.

And there’s one more top tip to bear in mind! Involving all your professional advisers – your accountant, financial adviser and solicitor – in your tax planning is absolutely key. While accountants focus on tax years, your financial adviser will think in decades to ensure you and your business enjoy a successful future.

If you have a question about tax allowances for businesses, we’re always happy to help – get in touch today.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

Auto enrolment is not regulated by the Financial Conduct Authority.

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