What is a balancing payment?

If you submit Self-Assessment tax returns and make Payments on Account to HMRC -- as many contractors do, you might need to make a balancing payment to pay the right amount of tax, writes Rachael Johnston at The Accountancy Partnership.

Firstly, what are payments on account, and when are they due?

Payments on Account are advance payments which you make to HM Revenue & Customs towards the following year’s tax bill.

Not everyone needs to make them, but if you’re self-employed and your Self-Assessment (SA) tax bill is more than £1,000, or if less than 80% of your tax is collected at source (for example, through PAYE) then you will be required to make a Payment on Account.

Be aware, Payments on account are made in two instalments. The first payment is due no later than January 31st (the same deadline as submitting and paying the previous year’s tax bill,) and the second instalment is due no later than July 31st.

How much are payments on account?

The amount you owe is based on what you earned in the previous year.

So, if your contracting business is growing quickly, you may notice these payments don’t cover the full amount of income tax you owe. This can be fixed by making a ‘balancing payment.’

What is a balancing payment?

In a nutshell, a balancing payment is the remainder of the tax you owe if your predicted earnings for the tax year are lower than what you’ve actually earned.

Payments on accounts are calculated by HMRC, based on how much you made the previous tax year.

So, if this year’s income exceeds last year's earnings, a balancing payment will settle the score!

When do I have to pay my balancing payment by?

You’ll need to pay your balancing payment by midnight on January 31st  -- at the end of the tax year it relates to.

This can all be slightly confusing, so we will give you an example to make it a little clearer!

Balancing payment example

Let’s say your bill for the 2022/23 tax year is £4,000. You’ll need to make payments on account because your bill is more than £1,000.

HMRC assumes next year’s tax bill will be the same, so your first payment on account is 50% of this year’s bill (£2,000).

The total due by midnight on January 31st 2024 will be £6,000.

This is because:

• Your 2022/23 tax bill is £4,000
• Your first payment on account towards your 2023/24 tax bill is £2,000 (which is half of your 2022/23 tax bill)

After this, you’ll make a second payment on account of £2,000 towards your 2023/24 tax bill. The deadline for this is July 31st 2024.

When you submit your 2023/24 tax return, your bill actually comes to £4,500. The two payments on account come to a total of £4,000, so you’ll need to make a balancing payment to cover the difference by midnight on January 31st 2024.

How do contractors pay a balancing payment?

Paying your balancing payment is straightforward, you can pay HMRC by:

• Cheque at your post office
• Direct debit
• Bank transfer (or BACS payment using a debit/credit card either online or telephone banking)

What happens if I can’t make a balancing payment?

The best thing to do is assess how much tax you think you’ll need to pay ahead of time, and if you believe you’ll miss a payment, let HMRC know as soon as possible.

You can do this by:

• Signing into your online tax account and either using the menu options or requesting to speak to an HMRC advisor.
• Telephone on 0300 200 3310 (HMRC is available to call Monday-Friday 8 am-6 pm)
• Sending a letter to Self Assessment, HM Revenue and Customs, BX9 1AS, United Kingdom.