The Most Common Tax Mistakes Small Business Owners Make – and How to Avoid Them
Chrissy Leach • 29 September 2025
Avoid these common tax pitfalls and keep your small business finances stress-free.
Running your own business is exciting - but it also comes with responsibility. One of the biggest challenges many small business owners face is staying on top of their taxes. Over the years, we’ve helped clients untangle tax messes, and the same mistakes crop up time and again.
Here are the most common tax pitfalls we see – and how you can avoid them.
1. Not Saving for Tax
When you’re just starting out, it’s tempting to think of every pound earned as “yours”, but HMRC will want its share. If you don’t put money aside as you go, you could be in for a nasty surprise when your tax bill arrives.
How to avoid it:
Set up a separate savings account and move a percentage of every payment you receive straight into it. As a rule of thumb, 20-30% works for most small businesses, but it depends on your circumstances.
2. Taking Drawings Instead of Salary/Dividends
Many limited company owners don’t realise that simply “taking money out” of the business isn’t the same as being paid properly. Taking drawings can lead to tax inefficiencies or even an overdrawn director’s loan account – with an unexpected tax charge (the dreaded S455).
How to avoid it:
Speak to your accountant about the most tax-efficient way to pay yourself – usually a mix of salary and dividends. That way you’ll stay compliant and avoid paying more tax than necessary.
Note that if you’re self-employed then the post-tax profit is yours and can be withdrawn.
3. Mixing Business and Personal Finances
Using your personal bank account for business transactions might feel convenient at the start but it quickly becomes a bookkeeping nightmare. It’s easy to lose track of income and expenses, and HMRC may question the accuracy of your records.
How to avoid it:
Open a separate business bank account from day one. It makes bookkeeping cleaner, tax returns easier, and gives you a clearer picture of how your business is really performing.
This is even more important for a limited company, the bank account must be in the company name.
4. Registering for VAT Too Late
Some business owners don’t realise they need to register for VAT once their turnover passes the threshold (currently £90,000). Missing this deadline can lead to backdated VAT bills, interest and penalties – a costly mistake.
How to avoid it:
Track your rolling 12-month turnover. If you’re getting close to the threshold, speak to your accountant early. Sometimes it even makes sense to register voluntarily before you’re required to.
5. Missing Out on Allowable Expenses
Too many business owners pay more tax than they should because they don’t claim all the expenses they’re entitled to. From home office costs to business mileage, small savings add up.
How to avoid it:
Keep detailed records and receipts throughout the year. If you’re unsure what you can and can’t claim, ask your accountant – we’d rather help you claim correctly than see you overpay.
Final Thoughts
Tax mistakes are easy to make - especially when you’re juggling everything else that comes with running a business. But with a bit of planning, good record-keeping, and the right advice, you can avoid the most common pitfalls.
At CJL Accountancy, we’ve helped countless small business owners get back on track after making these mistakes – but we’d much rather help you avoid them in the first place.
👉 If you’re worried about tax or just want peace of mind that you’re doing things the right way, get in touch today.
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For many small limited companies, especially those with one director-shareholder, the most tax‑efficient way to take income is usually a mix of salary and dividends. While the principles stay broadly the same each year, key thresholds do sometimes change, and those changes can affect everything from your personal tax bill to childcare entitlements. Below is an overview of what to consider for the 2026/27 tax year. 💡 This is general guidance only. Your ideal setup may differ depending on your wider income, benefits, rental properties, pensions, and more, so always take advice tailored to you. Director Salary Options for 2026/27 Director salaries normally fall into one of two efficient ranges: A) Salary up to the personal allowance (£12,570) This is often used when the only person on the payroll is a director, so the company does not qualify for the Employment Allowance. This level: Keeps you within the National Insurance credits system (protecting your State Pension record) Minimises tax and NI B) Higher salary when the Employment Allowance applies If your company has more than one director or another employee on payroll, you may be eligible for the Employment Allowance, which reduces employer’s NI by up to £10,500. In these cases, taking a higher salary can be more tax‑efficient because: Employer’s NI is covered by the Employment Allowance You get more corporation tax relief on the salary This option isn’t available for single-director companies with no other eligible staff. In some situations - particularly where there are two directors, Employment Allowance is available, and the business wants to extract higher levels of income - salaries of up to around £40,000 each can be more tax‑efficient. This depends heavily on your wider income, allowances and business profits, so it should always be checked with your accountant. Dividends for 2026/27 If you're looking to take any further income from your company after the salaries, you would take dividends, although they can only be paid when you have enough profit in the company. Dividends are taken from post tax profits which means that you don't get tax relief on them like you do for salaries. You should also make sure that dividends are declared in accordance with your shareholdings if there are more than one shareholders. The dividend tax rates in the basic rate band will increase to 10.75% (previously 8.75%) and 35.75% (previously 33.75%) from 6 April 2026. Other Considerations Personal allowance The tax-free personal allowance is £12,570, but you lose £1 of personal allowance for every £2 earned over £100,000. If your total income (salary + dividends + any other income) exceeds £100,000, your personal allowance tapers away. This creates an effective tax rate of 60% within the £100,000-£125,140 band, making careful planning essential. Child Benefit & Tax-Free Childcare Interactions You may need to pay back some or all of your Child Benefit if your adjusted net income exceeds £60,000. Dividends count towards this, which often catches directors by surprise. Tax-free childcare eligibility is based on both parents working, earning the minimum threshold (as salary, not dividends) and not earning over £100k (total income). So again, this is a key reason why personalised planning is essential. How Much Do you Need (or Want) Think about how much income you need (or want) your company to provide and speak to your accountant and the best way to optimise this whilst taking into account your personal circumstances and goals. Don't forgot to use other tax-efficient ways to extract profits from your company such as pension contributions, relevant life insurance, trivial benefits etc. Check out our previous blogs for more information on these. Final Reminder: Always Take Advice This article is general guidance only, tax rules are complicated, and the right salary/dividend balance varies person‑to‑person. If you're unsure what’s best for your situation, speak to your accountant, or if you’d like help from CJL Accountancy, we’d be happy to walk you through the best setup for the 2026/27 tax year. Contact us here .
