The Balancing Payment is part of the Account Payment process when you pay your tax bill by January 31st.
If you are self-employed (and at least 20% of your earnings are not taxable by PAYE), you must pay Income Tax in advance through Account Payment:
- Half by January 31st (the usual Self-Assessment tax return deadline)
- Half by July 31st
The amount payable by an individual depends on the previous year’s tax bill and payable in two equal instalments. The first payment is due by January 31st, the second by July 31st.
The following January, anything that an individual overpaid or underpaid from the previous year’s pay will be balanced.
An individual’s account contributions for the previous income tax year depends on their earnings. But they are entitled to make a ‘balancing charge’ if their earnings end up being higher.
So, if, for example, an individual owe £ 40,000 in income tax instead of £ 30,000 in the current tax year, despite only paying £ 30,000 in advance by account transfers, he/she must pay an additional £ 10,000 by the 31st January deadline.
Under the assumption that their increased earnings will continue into the following tax year, their cumulative account payments will also rise to £ 40,000.
How does balancing payment works?
As the advance tax bill depends on your previous year’s earnings, anything you overpay or underpay may need to be reconciled.
For example, if Jack earns £ 50,000 in the tax year 2019/20, his upfront payments for the tax year 2020/21 are based on this amount.
But to reconcile for his advanced bills, if he earns £ 60,000 in the tax year 2020/21, he will owe extra tax in January. If he makes less than projected, this is the same.
In January, HMRC will pay him back the excess amount for which he was overcharged.
Exception
An individual will not be required to make two payments in a given year if his tax bill was less than £ 1,000 for the previous year, or if he/she has already paid 80 per cent or more of any tax, they owed (through various deductions) in the prior year.
Note that the HMRC balancing payment will include tax due on a student loan or capital gains.
The reconciliation process is known as the balancing payment.