Tax is one of those areas where many people feel quietly confident.
HMRC’s online tools are reasonably user-friendly, there’s no shortage of guides and forums on the internet, and for straightforward situations (one employer, no investments or additional income) that confidence is often justified.
But for anyone with a pension, investments, property or a salary above £50,000, the gap between managing fine and optimising your tax position can be worth thousands of pounds over the course of a career.
This article covers five common pitfalls that catch out even the most financially savvy people who handle their own tax planning. It also looks at why professional advice is no longer an unaffordable luxury reserved only for the very wealthy.
The problem with DIY tax advice
Before getting into the pitfalls, it’s worth looking at where most people turn when they have a tax question. In most cases, that’s Google, a financial forum or, increasingly, an AI assistant.
These aren’t useless resources. But for anything beyond the basics, they’re unreliable.
Here’s why.
Tax legislation changes constantly. An article published 18 months ago might reference an allowance that’s since been frozen, tapered or abolished. AI tools present information confidently regardless of whether it’s current or correct. But because tax rules interact with each other in complex ways, a small inaccuracy in one area can lead to a significant mistake in another.
The risk of relying on outdated or inaccurate advice isn’t just about missing an opportunity. It’s about making important financial decisions based on bad information and not finding out until HMRC writes to you, which can sometimes be years later.
Pitfall 1: You can overpay tax for years without realising it
This is probably the most common pitfall, and the most frustrating, because the money disappears quietly rather than triggering an obvious problem.
Tax code errors are a good example. If your code is wrong, you could be paying too much each month without any notification from HMRC.
Higher-rate taxpayers who contribute to a personal pension often miss out on the additional 20% relief they’re entitled to claim through self-assessment, because their provider adds only basic-rate relief automatically. To put a figure on it, a higher-rate taxpayer contributing £500 a month to a personal pension and not claiming the additional relief is leaving £1,200 on the table every year. Over a decade, that’s £12,000.
Marriage allowance also goes unclaimed by thousands of eligible couples every year. So does the blind person’s allowance.
HMRC doesn’t go out of its way to flag these overpayments. The responsibility sits with you.
Pitfall 2: You can underpay without meaning to
The flipside of overpaying is underpaying, and that can result in penalties, interest and the anxiety that comes with an HMRC enquiry.
Common examples include failing to declare rental income (even from occasional holiday lets on platforms like Airbnb), not reporting any capital gains above the annual exempt amount, or assuming your side income from freelance work falls below the threshold when it doesn’t.
The rules around when you need to register for self-assessment also catch a lot of people out.
‘I didn’t know’ isn’t a defence with HMRC. Penalties start at a percentage of the unpaid tax and can escalate depending on whether the underpayment is judged as careless or deliberate.
In short, your potential tax liabilities create risk in both directions, which is why a joined-up view of your finances is essential.
Pitfall 3: You miss the big tax year-end opportunities
The end of the tax year on 5 April is one of the most valuable dates in the financial calendar. It’s also one of the most wasted.
ISA allowances are the most obvious example. You can shelter up to £20,000 per person in an ISA each year, with any growth and withdrawals completely free of tax. But the allowance doesn’t carry over. Miss a year and it’s gone. For a couple who could be sheltering £40,000 annually and don’t, the long-term cost in unnecessary tax on those investment returns can be substantial.
Pension contributions are another area with significant year-end tax planning potential. If you earn more than £100,000, your personal allowance gets tapered away at a rate of £1 for every £2 earned over that threshold. An additional pension contribution can reduce your adjusted income back below £100,000, restoring your personal allowance and effectively generating 60% tax relief. It’s one of the most generous exemptions available anywhere in the tax system.
Annual gifting limits for Inheritance Tax purposes also reset on 5 April. So do capital gains allowances. And if one spouse pays a lower rate of tax than the other, structuring your investments to make better use of both your allowances is a tax planning step that’s easy to overlook without someone prompting you to think about it.
None of this is complicated in principle. But without a plan in place well before April, it’s easy to let the window close.
Pitfall 4: You pay avoidable Capital Gains Tax
Capital Gains Tax is an area where timing and structure can make an enormous difference to how much tax you pay. Yet many people treat each disposal as an isolated event rather than considering their overall position.
The annual exempt amount, currently £3,000, is frequently left unused by people who don’t hold investments outside of pensions and ISAs but could benefit from moving assets into those wrappers in a tax-efficient way. ‘Bed-and-ISA’, where you sell investments and immediately repurchase them inside an ISA, is a straightforward planning tool that many DIY investors never consider.
Spouses can each use their own exempt amount, and assets can be transferred between spouses free of CGT before a disposal. So, so selling an asset held in one name without considering whether a transfer first might reduce the bill is a missed opportunity.
You can also offset any losses against capital gains in the same tax year, or carry them forward by up to four years, but only if you formally report them to HMRC. Many people don’t realise this is an option.
CGT rates have also changed in recent years, which is another reminder of why online or AI information is a poor substitute for current, personalised tax advice.
Pitfall 5: You only optimise for the short-term
Short-term tax efficiency can create long-term problems if your financial decisions aren’t joined up. This is the pitfall with the biggest long-term consequences.
A common example is pension withdrawal. Drawing too much from your pension in one year might seem efficient if you need the cash. But it can push you into a higher tax bracket unnecessarily and trigger a larger bill than a more gradual approach would have done.
Drawing your savings down in the wrong order, using your ISA before your taxable accounts, for instance, when the reverse might be more efficient, is another version of the same problem.
Gifts to family members are another area where short-term generosity can have unintended consequences. Large gifts made without understanding the seven-year rule for Inheritance Tax purposes might not achieve what the giver intended.
While online calculators and tools are great for getting a snapshot of your current position, they can’t model the cumulative effect of your decisions over a decade, or flag that what looks sensible today might create a tax problem in five years’ time.
Good tax planning is joined up. It looks at your pensions, investments, property and estate planning together, and it thinks in terms of decades rather than tax years.
Isn’t professional advice too expensive?
The perception that financial advice is a luxury you can do without is understandable. But it’s worth running the numbers before assuming it applies to your situation.
A single year of overpaid tax, a missed ISA allowance or a poorly timed asset disposal can cost more than a consultation with your financial adviser.
For higher earners, the value of recovering a tapered personal allowance through a pension contribution can be worth several times the cost of the advice that identified the opportunity.
So, the question isn’t whether tax advice costs money. Of course it does.
It’s whether it doing without it will cost you more.
And that’s where Glenrose Financial Planners can help.
We work with clients across Derby and the East Midlands to make sure their tax planning is doing what it should, not just for the current tax year, but as part of a longer-term financial plan.
Whether you’d like a one-off review to check you’re not missing anything, or ongoing tax planning advice as part of your broader retirement or investment strategy, our advisers can help you identify what you could improve and put a plan in place to address it. Book a consultation today to find out how we can help.