Do you need to pay a balancing payment?

For sole traders and self-employed individuals, you may find that your twice-yearly tax payments, due on the 31st of July and 31st of January, do not fully cover your Income Tax bill for that year. In this instance, you will be required to make a balancing payment to fulfil your tax liability.

But what is a balancing payment? In this informative blog from QuickBooks, we will go through what a balancing payment is, and why your twice-yearly advanced tax payments do not always cover your tax owed.

Looking to simplify your Self Assessment process? Try QuickBooks for free.

What is a balancing payment for Self Assessment?

You are required to make a balancing payment to HMRC if your predicted earnings, based on the previous tax year, are less than the actual amount you earned. In this instance you will not have paid enough tax, and an additional payment will be due to balance the amount of tax owed on your account.

When would I need to pay a balancing payment?

Balancing payments are due by midnight on the 31st of January following the end of the tax year related to the payment, and you are required to make payments on your account when your tax bill is more than £1,000 a year.

You will not be liable to make payments on account or balancing payments if your income is taxed at source, for instance through a PAYE scheme.

What does ‘payments on account’ mean?

Payments on account are payments made twice a year to fulfil your predicted tax bill for your current tax year, which is usually 50% of your predicted bill by the 31st of January, and the remaining 50% by the 31st of July.

This amount is calculated based on your previous year’s Self Assessment, which includes both your Income Tax and National Insurance contributions (NICs). For sole traders, Class 2 and Class 4 NICs are often paid alongside your Income Tax, forming part of the total amount due. 

This predicted figure is based on your prior year’s earnings, meaning the actual amount may differ from what you owe in the current year. If your income is higher than expected, you will need to make a balancing payment to HMRC. Conversely, if you’ve overpaid, you’ll be owed a tax rebate.

How is my tax bill paid?

You will pay two equal instalments of 50% each a year, but it is not always the case that this amount will be correct as you are not likely to have earnt the exact same amount of taxable income as the previous year. In fact, your aim as a self-employed worker is often to earn more each year, meaning a balancing payment will likely be required.

Here is an example of how you would pay your bill for the tax year 2024/25:

1. In this example, your tax bill for 2023/2024 is £6,000. In 2023, you made a total payment of £3,600 toward this amount in 2 instalments of £1,800.

2. By midnight on the 31st of January 2025 you will need to pay £5,400 in tax.

3. A balancing payment of £2,400 for the tax year 2023/2024, which is your total £6,000 tax bill minus the £3,600 you already made through payments on account in the previous year. This also includes your first 50% payment on account towards the tax year 2024/25 of £3,000.

4. You will then be required to make another 50% payment of £3,000 on the 31st of July 2025 to cover your predicted tax bill.

5. You will submit another Self Assessment by midnight on January 31st 2026. Depending on whether your predicted tax bill was correct, or if an overpayment or underpayment was made to HMRC based on this amount, then you will either be required to pay another balancing payment in tax year 2025/2026, or you will be owed a tax rebate.

In this example you can see that the balancing payments are an ongoing process for most people. It is possible that you will have paid too much tax and be owed a tax rebate rather than owe a balancing payment yourself, however, in most cases where a sole trader or self-employed business experiences growth year-on-year, it is more likely that you will continue to owe balancing payments each year.

You can read more about paying tax when you are self-employed in our blog.

How to make the payment

There are a number of ways you can pay your balancing payments and payments in advance. These are:

• By cheque

• At a Post Office

• Direct Debit

• Direct bank transfer (BACS payment or on your debit/credit card online or over the phone)

Each of these payment methods will take different amounts of time to clear with HMRC, so you should bear this in mind before choosing how to pay your balancing payment. If you fail to pay your balancing payment on-time due to a clearing issue or a late payment submission through slower methods such as cheque or BACS payments, then you may be subject to late payment fees.

For instance, payments made through BACS usually take around 3 business days to clear, whilst cheque payments will often take around 5 business days to clear, not accounting for the time it takes for the postal delivery of a cheque to arrive with HMRC.

Payments made via direct debit or directly over the phone or online are usually the quickest way to ensure your payments are made on time. You can read more about this in our HMRC tax penalties blog.

What if I can’t make the balancing payment?

If you are unable to make your balancing payments on time then you should inform HMRC as soon as you are aware of the issue, as failure to notify HMRC on time will likely result in late payment penalties.

You can contact HMRC using one of the following methods:

• Through your online tax account if you file your tax returns online. Log on to your online tax account and navigate to the relevant query, or use the online web chat to speak to an HMRC adviser directly.

• Over the phone by calling HMRC on 0300 200 3310 between 8am-6p Monday-Friday.

• By letter addressed to Self Assessment, HM Revenue and Customs, BX9 1AS, United Kingdom.

What happens if I overpay on my Self Assessment?

If you have made an overpayment on your Self Assessment then you will be owed a tax rebate from HMRC via a P800 form, which you will receive at the end of each tax year.

Payments for a tax rebate are usually paid within 5 working days of receiving your P800, however, you may also receive a cheque for the amount owed within 14 days of your P800.

How do balancing payments work for contractors?

For contractors, your balancing payments will be paid in the same way as self-employed or sole traders. You can pay HMRC via the following three methods: 

• Cheque at your post office

• Direct debit

• Bank transfer (or BACS payment using a debit/credit card either online or telephone banking)

How can I make Self Assessment easier?

Looking to simplify your self-assessment process? Look no further than QuickBooks’ easy-to-use accounting software for self-employed and sole traders.

QuickBooks’ software provides an income tax estimate tool to help you determine how much tax you may owe on your self-assessment by connecting with your banking apps, allowing you to prepare for your balancing payments each year.

Ready to take the stress away from preparing your Self Assessment? Try QuickBooks free for 1 month to see how our software can help you.

Found this article about Self Assessment useful? Using software like QuickBooks is a great way to make sure you stay on top of your taxes.

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