The Top 5 Tax Mistakes People Make – And How to Avoid Them

As we journey through life, we often think of taxes as a burdensome inevitability—a necessary evil that takes away a chunk of our hard-earned money. But taxes don’t have to feel like a punishment. With the right approach, you can reduce your tax liabilities and maximise your financial growth. The problem? Most people aren’t sure where to start. Whether you’re an entrepreneur, a business owner, or simply an individual managing your finances, many of us make tax mistakes—mistakes that, when compounded over time, can significantly impact our financial stability.

But here’s the good news: most tax issues are preventable. Avoiding common pitfalls isn’t as difficult as it seems once you understand where you’re going wrong and how to address it.

In this article, we’ll explore the top 5 tax mistakes that people often make, and, most importantly, we’ll guide you through how to avoid them. Along the way, I’ll share insights based on decades of experience—combined with the behavioural insights of experts like Rory Sutherland and Derren Brown—to ensure that these mistakes don’t derail your financial plans.

Mistake #1: Not Planning Ahead for Capital Gains Tax

We live in a world that constantly shifts—the value of our investments, the real estate market, the stocks and bonds we hold, and of course, the properties we own. As assets appreciate, the temptation is to ignore how capital gains tax will affect the value of those assets when it’s time to sell. But failing to plan for capital gains tax is one of the most common (and costly) mistakes that high-net-worth individuals make.

When you sell an asset, such as property or stocks, you’ll be taxed on the profit you make—the difference between the price you bought the asset for and the price you sell it for. The tax rate can be significant, particularly if you’ve held the asset for years. But don’t assume that there’s no way to minimise this liability.

How to Avoid It:

One key strategy here is to plan your asset disposals in advance. If you know that you’ll need to sell an asset, consider spreading the sale across different years to make the most of annual exemptions or lower tax brackets. Alternatively, holding onto an asset for longer might allow you to benefit from tax exemptions or reliefs, particularly for properties that qualify for Private Residence Relief.

There’s also something called bed and breakfasting, a strategy used to offset capital gains tax by selling and then repurchasing the same asset. But don’t rush into these moves. As Rory Sutherland often points out, the most effective decisions often come from a subtle shift in perspective. “You’re not just avoiding taxes, you’re optimising your wealth,” he says. Approach it with strategy, not a rush for immediate results.

Mistake #2: Failing to Utilise Allowances and Reliefs

If you’re not making use of the allowances and reliefs available to you, you’re essentially leaving money on the table. And yet, many people don’t take full advantage of what’s available. Tax laws are filled with various reliefs—such as Inheritance Tax (IHT) relief, pension contributions, or annual investment allowances—that can significantly reduce your tax burden.

Take pension contributions, for instance. Contributions to pensions are tax-deductible, meaning that if you’re not contributing enough, you’re likely paying more in tax than necessary.

How to Avoid It:

Review your financial position with a tax adviser regularly to ensure that you’re fully utilising allowances and reliefs that apply to you. If you haven’t explored pension contributions for tax efficiency, it might be time to revisit that strategy. Similarly, you could make use of gifting allowances to family members, thus reducing the value of your estate and helping to avoid inheritance tax in the future.

As Derren Brown would put it, “Perception is everything.” People often perceive tax planning as something difficult or uncomfortable. But once you adjust that perception and see it as a tool to manage your wealth efficiently, it becomes an empowering choice, not a chore.

Mistake #3: Ignoring the Impact of Tax on Retirement Withdrawals

You’ve worked hard for your retirement fund, and as you near retirement age, the idea of withdrawing funds for income can seem like the logical next step. But many people fail to realise that withdrawals from pensions and other retirement savings are subject to taxation. Depending on how much you withdraw in one go, this could push you into a higher tax bracket.

How to Avoid It:

When you begin taking withdrawals from your pension, be strategic about it. Instead of withdrawing large sums all at once, spread the withdrawals over several years to avoid higher tax rates. The key is balancing your needs with the tax impact. Speak with your financial adviser about the best way to structure these withdrawals for maximum benefit.

In the words of Rory Sutherland, “It’s about taking small, clever actions that shift your financial journey in the right direction.” Retirement withdrawals are a classic example where a little bit of planning can save you a lot.

Mistake #4: Not Keeping Good Records (and Missing Deductions)

This is the most simple yet easily overlooked mistake. Good record-keeping is essential for maximising tax deductions and preventing issues down the road. Whether it’s personal or business-related, many people overlook the power of keeping accurate and detailed records. The result? Missed deductions and higher taxes than necessary.

How to Avoid It:

Invest in a reliable record-keeping system. If you own a business, use software to track your expenses, sales, and receipts. For personal finances, make sure you track your charitable donations, business expenses, and other deductible items. Keep receipts, invoices, and other relevant documents organised and easily accessible.

Remember: it’s not just about collecting documents, but about ensuring that you have a clear picture of your financial landscape. Good records allow you to maximise deductions, minimise tax payments, and avoid future headaches when the taxman comes calling.

Mistake #5: Procrastinating on Tax Planning

One of the most harmful things you can do is put off tax planning until the last minute. People often wait until the end of the tax year or until they get a notification from HMRC. However, effective tax planning is not just about crunching numbers at the last minute—it’s about long-term strategy.

How to Avoid It:

Start your tax planning at the beginning of each tax year. Proactively engage with a financial adviser who can help you strategise, implement tax-efficient moves throughout the year, and ensure you’re taking advantage of all allowances, reliefs, and tax-saving opportunities.

Take it from Derren Brown: “What you do in the now shapes your future.” Delaying tax planning until the last minute is like trying to fix a problem after it’s already caused a chain reaction. Avoiding procrastination and planning ahead allows you to remain in control, secure in the knowledge that you’re optimising your financial situation year-round.

Conclusion: Take Control of Your Financial Future

Tax mistakes don’t just impact your bottom line—they can derail your long-term financial security. But by understanding these common mistakes and taking proactive steps to address them, you’ll be in a better position to manage your wealth and minimise your tax burden.

At Kingswood Law, we’re here to help you navigate the complexities of tax planning and financial strategy. Whether you need advice on capital gains tax, tax-efficient investments, or retirement planning, we’ve got the expertise to help you optimise your wealth.

Contact us today to start planning your tax strategy and avoid these common mistakes. Your financial future is too important to leave to chance.