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When you think of Halloween, images of ghosts, ghouls, and horror movie monsters probably come to mind. However, as a business owner, you could face more practical and very real scares if you don’t keep on top of your tax liabilities.
Tax mistakes could have frightening consequences, such as:
- Unexpected tax bills
- Penalties and interest
- Missed opportunities to save on tax
- Stress and avoidable admin
- A greater risk of an HMRC tax investigation.
Keep reading to learn about four common tax mistakes business owners make and find out how to avoid these pitfalls.
1. Poor record-keeping
This is one of the most common and avoidable tax mistakes business owners make. Disorganised documents, missing invoices, and bank transactions that haven’t been reconciled make it much harder to complete your tax return accurately. There’s also a higher risk of overlooking legitimate expenses or making incorrect claims.
Moreover, since 6 April 2026, sole traders and landlords with qualifying income over £50,000 must comply with Making Tax Digital (MTD) for Income Tax. This will be extended to those with qualifying income over £30,000 from April 2027, and over £20,000 from April 2028. Additionally, all VAT-registered businesses have been required to comply with MTD for VAT since 1 April 2022.
If MTD applies to your business, you must log receipts and invoices regularly using compatible software and send quarterly updates to HMRC. Failure to do so could result in late submission penalties or late payment penalties and interest.
How to avoid this scary mistake
- Use MTD-compatible software, if you’re required to do so.
- Record income and expenses promptly.
- Reconcile bank accounts at least monthly.
- Scan paper receipts and save them digitally.
- Review records quarterly, not only at year-end.
- Add a brief description to unusual transactions or expenses.
2. Not budgeting for tax liabilities
If you don’t set aside funds each month to cover your tax liabilities, you could get a nasty fright when your next bill arrives.
That’s why it’s crucial to understand your tax liabilities and include them in your monthly budget.
If your last Self Assessment bill was more than £1,000 and less than 80% of that tax was collected at source (through PAYE or other deductions), HMRC requires you to make “payments on account”. These are advance payments towards your next Self Assessment bill, which are paid in two instalments due by midnight on 31 January and 31 July.
The amount you owe is calculated based on your estimated earnings (typically the amount you earned in the previous year), and each payment is usually half of the tax you owed in the last tax year. If you earn more than this estimate, you may also need to make a “balancing payment” to cover the difference.
If you receive a large bill that you’ve not prepared for, either at year-end or when payments on account are due, this could lead to serious cash flow problems.
How to avoid this scary mistake
- Transfer a percentage of business income into a separate savings account for tax payments each month.
- Review your estimated liability regularly and adjust your expectations in line with changes in profit and legislation.
- Include contributions towards your next tax bill when planning your monthly cash flow.
3. Mixing personal and business finances
If you’re a sole trader, mixing finances can create confusion between business and personal transactions, making it harder to assess your tax liabilities. It can also complicate bookkeeping and increase the risk of mistakes, such as claiming personal spending as a business expense. As such, it’s best practice to keep your personal and business finances separate.
If you own a limited company, this is treated as a separate legal entity. Therefore, your business finances must be kept separate from your (the director’s) personal finances. Mixing the two could result in you spending money belonging to the business, creating legal, accounting, and tax consequences.
How to avoid this scary mistake
- Set up a dedicated business account.
- Only use company debit and credit cards for business purposes.
- Directors should agree with their accountant how salary, dividends, expenses, and loans will be recorded.
4. Failing to claim all allowable expenses
As a business owner, you can deduct various running costs (“expenses”) from your turnover before taxable profit is calculated. These might include office supplies, business travel, insurance, training, certain equipment, and so on.
An example provided on the government website shows how valuable this can be: if your turnover is £40,000 and you claim £10,000 in allowable expenses, you’ll only pay Income Tax on the remaining £30,000.
Failing to identify and claim legitimate expenses could mean declaring a higher taxable profit and therefore paying more tax than necessary.
How to avoid this scary mistake
- Make sure you understand what qualifies as an allowable expense by checking government guidance or speaking to an accountant.
- Review your expenses regularly rather than waiting until your tax return is due.
- Record the business purpose of expenses you want to claim for.
- Keep receipts and supporting evidence.
- Record expenses under categories, such as “travel” and “marketing” to make costs easier to identify.
We can help you keep your business as tax-efficient as possible
At Sovereign, we specialise in supporting business owners with all their financial planning needs.
We can help you avoid costly tax mistakes by reviewing your business’s cash flow, tax liabilities, and long-term financial plan. You’ll gain a better understanding of your options, allowing you to make informed decisions that support a tax-efficient and financially secure future for you and your business.
To find out more about the services we offer, email hello@sovereign-ifa.co.uk or call us on 01454 416653.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
Approved by Best Practice IFA Group Ltd on: 20/10/2026