Common Tax Planning Mistakes

Key facts

Failing to use the £3,000 CGT annual exemption wastes a tax-free allowance that cannot be carried forward.
Missing the Self Assessment deadline triggers an automatic £100 penalty, even if you owe no tax.
The 60% tax trap between £100,000 and £125,140 catches many taxpayers unaware.
Not claiming Marriage Allowance costs eligible couples up to £252 per year.
HMRC penalties for deliberate errors can reach 100% of the tax understated.

Mistake 1: Not Using Annual Allowances

Several valuable tax allowances expire at the end of each tax year and cannot be carried forward:^[1]

Allowance	2026/27 Amount	Lost If Not Used
Personal Allowance	£12,570	Up to £5,028 tax saving (at 40%)
ISA allowance	£20,000	Tax-free investment growth, forever
CGT annual exemption	£3,000	Up to £720 tax saving (at 24%)
Dividend allowance	£500	Up to £197 tax saving (at 39.35%)
Pension annual allowance	£60,000	Up to £27,000 tax saving (at 45%)
IHT annual gift exemption	£3,000	Up to £1,200 IHT saving (at 40%)

Fix: Review your allowances in January each year and take action before 5 April. See our Year-End Tax Planning Checklist for a complete guide.

Mistake 2: The 60% Tax Trap

Income between £100,000 and £125,140 is effectively taxed at 60% because of the tapered loss of the Personal Allowance. Many taxpayers do not realise this until they see their tax bill.^[1]

Pension contributions reduce your adjusted net income — contribute enough to bring income below £100,000
Gift Aid donations also extend your basic rate band and reduce adjusted net income
Salary sacrifice reduces your official salary, potentially avoiding the trap entirely

Mistake 3: Filing or Paying Late

HMRC penalties for late filing are automatic and apply even if you owe no tax:^[2]

1 day late: £100 penalty
3 months late: £10 per day (up to 90 days = £900)
6 months late: 5% of tax due or £300 (whichever is higher)
12 months late: Further 5% or £300, potentially rising to 100% of tax for deliberate withholding

Interest on late payments: In addition to penalties, HMRC charges interest on any tax paid late. The current rate is set at base rate plus 2.5%, reviewed quarterly. Interest is not deductible and is charged from the original due date.

Mistake 4: Using the Wrong Business Structure

Choosing the wrong structure — or failing to review it as circumstances change — can cost thousands per year:

Staying as a sole trader when profits exceed £50,000 — potentially overpaying NI and Income Tax compared with a company structure
Incorporating too early — company compliance costs may outweigh tax savings at lower profit levels
Not splitting income with a spouse — using only one Personal Allowance and basic-rate band when two are available

See Choosing a Business Structure and Income Splitting for Couples for guidance.

Mistake 5: Not Claiming Marriage Allowance

If one spouse earns less than £12,570 and the other is a basic-rate taxpayer, transferring £1,260 of the Personal Allowance saves £252 per year. You can backdate the claim for 4 years, recovering up to £1,008.^[1]

Mistake 6: Pension Contribution Errors

Not claiming higher-rate relief: The pension scheme claims basic-rate relief automatically, but higher-rate and additional-rate taxpayers must claim the extra relief through their Self Assessment return
Exceeding the annual allowance: Contributions above £60,000 (or the tapered allowance) incur a tax charge at your marginal rate
Forgetting carry forward: You can use unused allowance from the previous 3 years, potentially contributing well over £60,000
Personal vs employer contributions: Company directors should generally use employer contributions to save NI

Mistake 7: CGT Miscalculations

Not using the annual exemption: The £3,000 exemption cannot be carried forward^[3]
Forgetting spouse transfers: Transfers between spouses are CGT-free, so each spouse can use their own exemption
Ignoring the 60-day property reporting rule: UK residential property disposals must be reported and CGT paid within 60 days of completion
Not claiming all allowable costs: Legal fees, stamp duty, and improvement costs all reduce the gain

Mistake 8: Poor Record-Keeping

HMRC can disallow expense claims if you cannot produce supporting evidence. Common failings include:

Not keeping receipts for business expenses
Mixing personal and business bank accounts
Not recording mileage for business travel
Discarding records before the retention period expires (5 years for income tax, 6 years for companies)

Frequently Asked Questions

What is the 60% tax trap?

When your income exceeds £100,000, you lose £1 of Personal Allowance for every £2 of income above that threshold. This means income between £100,000 and £125,140 is effectively taxed at 60% (40% Income Tax plus the 20% effect of losing the Personal Allowance). Pension contributions or Gift Aid donations can reduce your adjusted net income below £100,000 to avoid this trap.

Can I carry forward unused personal allowance?

No. The Personal Allowance (£12,570) is a use-it-or-lose-it annual allowance. If you do not use it in a tax year, it is lost forever. The only partial exception is the Marriage Allowance, which lets a non-taxpayer transfer £1,260 to a basic-rate taxpayer spouse.

What penalties does HMRC charge for mistakes on tax returns?

Penalties depend on the nature of the error. Careless mistakes attract penalties of 0–30% of the tax understated. Deliberate errors attract 20–70%, and deliberate concealment 30–100%. Penalties are reduced if you tell HMRC before they discover the error and co-operate fully.

Is it a mistake to pay into a pension through my company?

Quite the opposite — employer pension contributions are usually more tax-efficient than personal contributions because they save both employer NI (15%) and employee NI (8%). A common mistake is making personal contributions when employer contributions would be available.

Sources

Income Tax rates and personal allowances — GOV.UK
Self Assessment: penalties — GOV.UK
Capital Gains Tax: rates and allowances — GOV.UK