The Balancing Payment is a component of the Payment on Account procedure, which must be settled by the 31st of January when you make your tax payment.
If you are a self-employed individual and at least 20% of your earnings are not subject to taxation via PAYE, it is necessary for you to make advance payments of Income Tax through Payment on Account.
- 50% by January 31st (the typical date for filing the Self Assessment tax return)
50% by July 31st - Any excess or insufficient payment made in the previous year will be reconciled in January of the following year.
I am a novice freelancer.
As a newly self-employed individual, you will incur higher tax obligations in your first year compared to the standard amount. You will be billed for the whole tax year in which you have recently been employed. And then HMRC will also collect an advance payment for the tax year that you’re presently in.
As an example, during the tax year of 2022/23, you would be required to pay:
- January 31, 2024
- Income tax during the fiscal year 2022/23
- You will get 50% of your projected 2022/23 profits in advance, which is calculated based on your 2021/22 earnings.
- July 31, 2024
- Half of your projected profits for the 2022/23 fiscal year, which are anticipated based on your results from the 2021/22 fiscal year.
- January 31, 2023
- Any amount that exceeds or falls short of HMRC’s estimate is reconciled by either refunding or paying the difference.
To put it simply, when you make your first payment using Payment on Account, you will get a tax invoice that is 150% more than your anticipated amount. The 100% refers to the completed tax year, while the remaining 50% represents half of the upfront payment for the ongoing tax year.
What is the mechanism behind the balancing payment?
Since the advance tax bill is calculated using your earnings from the previous year, it may be necessary for you to reconcile any excess or insufficient payments. If your annual income for the 2021/22 tax year is £30,000, then your first payments for the 2022/23 tax year will be calculated based on this amount.
However, if your actual earnings for the 2021/22 tax year amount to £40,000, you will be required to pay more tax in January to balance your already paid forward expenses. It remains unchanged if your earnings are lower than anticipated. HMRC will repay you in January for what you were overpaid.
The act of reconciliation is referred to as the balancing payment.
