The Top 7 Tax Mistakes Small Business Owners Make (and How to Avoid Them)
Running a small business in the UK comes with many responsibilities, and one of the most important is keeping on top of your taxes. Unfortunately, many small business owners fall into the same traps year after year — from missing deadlines to claiming the wrong expenses. These mistakes don’t just cause stress; they can lead to penalties, cash flow issues, and even HMRC investigations.
This article explains the seven most common tax mistakes UK small business owners make, along with practical steps to avoid them.
1. Missing Deadlines
Why It Happens
Many business owners get caught up in day-to-day operations and leave tax filings until the last minute. Key deadlines include:
Self Assessment tax return: 31 January (online)
Corporation Tax return (CT600): usually 12 months after year-end
VAT returns: typically quarterly
PAYE submissions: each time you run payroll
Consequences
Late filing penalties
Interest charged on late payments
Possible HMRC scrutiny
How to Avoid It
Use a digital calendar with automatic reminders.
Work with an accountant who will prepare and file on time.
Don’t wait until January to gather paperwork; keep records updated monthly.
2. Claiming Incorrect Expenses
Why It Happens
There’s often confusion about what is and isn’t allowable. Common mistakes include:
Claiming personal costs as business expenses.
Forgetting to claim legitimate costs such as home office, travel, or professional subscriptions.
Consequences
Over-claiming may result in penalties if HMRC finds errors.
Under-claiming means you’re paying more tax than necessary.
How to Avoid It
Familiarise yourself with HMRC’s rules on allowable expenses.
Keep receipts for everything and note the business purpose.
Use cloud software to track expenses in real time.
Ask your accountant to review expenses at least quarterly.
3. Mixing Personal and Business Finances
Why It Happens
Sole traders and small company owners often use one bank account for both personal and business transactions.
Consequences
Confused records and errors in tax returns.
Harder to prove which expenses are genuine business costs.
Wasted time untangling accounts at year-end.
How to Avoid It
Open a separate business bank account.
Use a dedicated business card for all company spending.
Regularly reconcile transactions to stay organised.
4. Forgetting VAT Registration
Why It Happens
Some businesses grow quickly and overlook the VAT registration threshold of £85,000 turnover in 12 months.
Consequences
HMRC can backdate your VAT registration.
You may owe VAT for past sales, creating a large unexpected bill.
How to Avoid It
Monitor your rolling 12-month turnover, not just annual figures.
Register early if you’re close to the threshold.
Consider voluntary registration to reclaim input VAT and appear more professional.
5. Ignoring PAYE Obligations
Why It Happens
Small businesses often hire staff or pay directors without understanding PAYE rules.
Consequences
Incorrect or late payroll submissions.
Underpayment of tax and NICs, leading to penalties.
Dissatisfied employees due to errors.
How to Avoid It
Register as an employer with HMRC before paying staff.
Use payroll software that automatically files RTI (Real Time Information).
Engage an accountant or payroll provider to manage compliance.
6. Poor Record-Keeping
Why It Happens
Busy owners may keep receipts in a shoebox or rely on memory instead of structured systems.
Consequences
Missed expense claims.
Difficulty proving figures if HMRC investigates.
Higher accountancy fees if records are messy.
How to Avoid It
Keep digital copies of all invoices and receipts.
Use accounting software like Xero, QuickBooks, or FreeAgent.
Review and reconcile records monthly.
7. Not Planning for Tax Liabilities
Why It Happens
Many owners view profits as “spare cash” without setting aside funds for tax.
Consequences
Shock tax bills in January or after year-end.
Cash flow issues and reliance on loans or credit cards.
How to Avoid It
Estimate your tax bill quarterly.
Set aside around 20–30% of profits into a separate account.
Use an accountant to forecast tax and National Insurance accurately.
Avoiding tax mistakes isn’t just about staying compliant — it’s about keeping your business financially healthy and stress-free.
To recap, the most common mistakes are:
Missing deadlines
Claiming incorrect expenses
Mixing business and personal finances
Forgetting VAT registration
Ignoring PAYE obligations
Poor record-keeping
Failing to plan for tax bills
By staying organised, using the right tools, and working with a qualified accountant, you can avoid these pitfalls and focus on what matters most: growing your business.
