Making smart tax decisions can save you thousands, but getting it wrong could mean paying far more than you need to. The trouble is, tax rules can feel overwhelming, and it’s easy to fall into traps that could have been avoided with a little forward planning. If you want to make sure you’re not giving more to the taxman than necessary, here are some common mistakes to watch out for.
Think beyond the business
Many business owners focus so much on growing their company that their own financial planning takes a backseat. Pensions, for example, often get left until later, but delaying contributions means missing out on valuable tax relief and the long-term growth potential of those funds. The earlier you start, the better off you’ll be in retirement, and it’s one of the most tax-efficient ways to save. Similarly, how you pay yourself can make a big difference. A well-balanced approach using a combination of salary, dividends, and pension contributions can be far more tax-efficient than simply taking a large salary, yet too many business owners fail to review this regularly
Buying yourself time – and equipment!
Another costly mistake is delaying business expenses when they could be used to reduce taxable profits in the current year. If you’ve been thinking about investing in new equipment, upgrading software, or undertaking staff training, it may make sense to bring those expenses forward rather than pushing them into the next tax year.
Keep things separate
The most common mistake I see with business owners is failing to keep their business and personal accounts separate, especially their tax pots. Dividends, whether paid monthly quarterly or annually are paid gross. That means unless you save your tax in real time from these payments, you could get a nasty surprise when you come to Self-Assess. Assuming you are a higher rate tax payer, as a general rule of thumb, keeping 20% of your dividends in a separate tax pot in your personal accounts is a great way to ensure you don’t have to panic when it comes to January.
The £100,000 question
Perhaps the most punitive tax trap is the £100,000 threshold when it comes to earnings. Between £100,000 and roughly £125,000 of earnings, your Personal Allowance is tapered back on a 1:2 ratio meaning your allowance is zero if your income is £125,140 or above. This means that the effective rate of tax between these two earnings thresholds is 60%. We’re not wishing to put a ceiling on anyone’s earnings, but if you are “flirting” around these thresholds, then tactical use of pension contributions and potentially tax efficient investments can reduce this punitive tax rate in this earnings space.
Use your allowances
Each year, the government provides allowances for capital gains, dividends, and savings interest, but if you don’t use them, you lose them. This also goes for ISAs and Pension contributions. Reviewing your finances regularly can help ensure you’re making the most of what’s available.
Tax efficient investments
Ignoring tax-efficient investments is another trap that catches people out. ISAs and pensions are well-known options, but many overlook alternative routes such as Venture Capital Trusts (VCTs) or Enterprise Investment Schemes (EIS), which can offer significant tax benefits depending on your situation. However, these types of investments are high risk and may not be suitable for everyone, so it’s essential to speak to a financial adviser before making any decisions. Leaving large amounts of cash in standard savings accounts may feel safe, but it’s often not the most effective way to grow wealth in a tax-efficient manner.
Tax planning doesn’t have to be complicated, but taking action now can save you thousands in the long run. At Seymour Financial, we help business owners and entrepreneurs make smart financial decisions that minimise tax and maximise wealth.
Don’t wait until it’s too late. Get in touch today for expert guidance tailored to your situation.
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