Tax Glossary

Balancing Payment

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Last updated on:
March 17, 2024

The Balancing Payment is a critical component of the Payment on Account system utilized by HMRC to manage tax payments for the self-employed. This process plays a pivotal role in ensuring taxpayers meet their tax obligations in a timely and efficient manner.

Payment on Account System

For self-employed individuals, especially those whose income is not predominantly taxed through PAYE, the Payment on Account system mandates advance tax payments. These are divided as follows:

  • First half payment is due by 31st January (coinciding with the Self Assessment tax return deadline).
  • Second half payment is due by 31st July.
  • Adjustments for overpayments or underpayments from the prior year are settled the following January.

For First-Time Freelancers

Entering the realm of self-employment triggers an initial higher tax obligation. In your debut year, you'll face a tax bill encompassing:

  1. 31st January 2024: Tax for your earnings in the 2022/23 tax year, plus an advance payment (50% of your 2022/23 earnings) based on the previous year's earnings.
  2. 31st July 2024: The second installment (50% of your 2022/23 earnings) as an estimated advance payment.
  3. 31st January 2023: Reconciliation of overpayments or underpayments is conducted based on actual earnings versus estimates.

This system results in a hefty initial tax bill, essentially 150% of what might be anticipated, due to the inclusion of advance payments for the upcoming tax year.

Understanding the Balancing Payment

The essence of the Balancing Payment lies in its reconciliation feature. It adjusts the difference between your advance payments and actual tax liability based on real earnings. For example:

  • If your earnings for the 2021/22 tax year were £30,000, your advance payments for 2022/23 would be predicated on this figure.
  • Should your earnings for the 2021/22 tax year ascend to £40,000, an additional tax payment will be required in January to rectify the discrepancy in advance payments.

This reconciliation ensures that taxpayers neither overpay nor underpay their taxes, maintaining a balanced account with HMRC.

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