UK Chartered Accountants Explain: The Two Biggest Tax Mistakes

Author: Russell Smith
January 9, 2018

Worried you might be making mistakes when it comes to tax management? We explain the two biggest mistakes that catch out most small business owners.

Stressed out businessman at desk. Biggest tax mistakes made by small businesses

Tax management is a source of anxiety for many business owners. While running a company and marketing your services and products may seem like second nature, financial processes can be something that causes a great deal of grief.

Managing your tax obligations and correctly handling your money is a complicated process. Our chartered accountants had to train for years to become specialists in the industry, yet many SME owners are left to deal with things on their own, with little in the way of guidance or support.

The biggest worry people often have is that they are making tax mistakes. Whether it’s filling in forms incorrectly or recording their expenses poorly, there are many elements of accounting that need to be carried out carefully and thoughtfully. Often, these elements require some degree of prior knowledge, as this can be a major stressor for business owners.

At Russell Smith Chartered Accountants, we’ve seen it all.

For over a decade, we’ve been managing the accounts of countless small business clients and know exactly what mistakes company owners are making. After all our experience, we’ve identified the two biggest tax mistakes that almost every novice in the world of business financial management has made some point.

So what are they, and how can you avoid them?

Biggest Tax Mistake One: Earn Less to Earn More

In British taxation, there exist tax bands. As of 2017, they are as follows:

  • £11,500 — untaxed
  • £11,500 to £45,000 — 20%
  • £45,001 to £150,000 — 40%
  • £150,000 or over — 45%

Depending on what you earn, you will be taxed a certain amount. It seems fairly clear cut in terms of what sort of tax bill you’ll have to pay. However, those with limited accountancy knowledge often miss one crucial detail.

The scenario often plays out like this.

The business owner is bringing in £145,000 per year. They have the ability to earn £155,000 per year, but they keep their wage below the additional tax threshold as to not pay the 45% rate. Instead, they maintain their current earnings and pay the 40% tax rate instead.

Smart move, right? Well, sadly, this is a tax mistake. This is not how tax bands work.

Tax bands rise with increased income, but the higher rates only apply to income over the previous bracket. For example. A small business owner earning that £145,000 will pay 40% on that tax. If they were to move up to £155,000, they would not pay 40% on their entire income, only on the £5000 that hits the additional tax rate.

These are the figures for take-home pay, as accurate in December 2017:

  • £145,000 gross = £87,276 net
  • £155,000 gross = £92,826 net

As you can see, despite hitting the higher tax bracket, the business owner takes home more cash. The basic principle of taxation is the more money you make, the more money you’ll take home. You’ll never be in a position where somebody earning £5000 less than you are actually taking home more because they are in a lower tax bracket.

Keep earning, keep growing and avoid this — one of the biggest tax mistakes our chartered accountants come across!

Biggest Tax Mistake Two: Deductibles Mean You Save on Tax

Tax deductibles are tricky business. They encompass a variety of items and services, but we’re not here today to debate what is deductible and what isn’t.

While small business owners sometimes get confused about what is tax deductible, they are often very clued up as to how it works. You spend money on an item and write it off as tax deductible. The amount of tax you pay drops because it is included as a non-taxable purchase and, therefore, causes your personal/business allowance to rise.

The idea many business owners have is that by purchasing items and increasing their non-taxable income allowance, they’ll actually reduce their business costs.

This is a big tax mistake.

Tax deductibles work on a percentage basis, based on your tax rate. You do not claim the money for the item paid, just the tax paid on it. For example, if you were on a basic rate of 20% and you bought a computer for £1000, you can claim the tax back on that computer, which is £200.

You’ve saved £200, but you’ve spent £800 of your income.

Buying deductibles is always a good thing if you need them. The money you can claim back from tax is worth something, but it does not ever save you the full amount of purchase, just a percentage base.

The second biggest tax mistake we see is that business owners start to buy up tax deductibles items at the end of the year — items they don’t need — to reduce their tax bill. Technically, the bill will go down, but it won’t recuperate the costs of actually buying the items in the first place.

It won’t come close, even if you are on the highest tax rates.

Still concerned you might be making big tax mistakes and the need help of a chartered accountant? Don’t let your finances suffer. Get in touch with our UK accountants today we’ll help support your business goals!

0113 394 4616

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