The next step, of course, is to pay this bill in bi-annual instalments known as payments on account. These advance payments are based on your previous year’s tax bill, with a first payment due 31st July and a second payment due 31st January.
However, if it’s been a busy year for you, you might notice that these two payments don’t cover your full Income Tax bill for this year. In this case, you may need to pay a balancing payment.But what is a balancing payment? In this article, we’ll be having a look at what a balancing payment is, how to pay it, and what to do if you can’t.
What is a balancing payment?
In short, a balancing payment is the amount you need to pay when your predicted and actual earnings do not match.To understand how balancing payments work, we’ll first need to dive into payments on account.
What are payments on account?
A payment on account is a portion of your Self Assessment tax bill that you need to pay ahead of time as a self-employed individual. These Self Assessment payments are paid on a bi-annual basis, the first payment being on 31st July and the second payment due on the 31st January.These amounts are calculated by HM Revenue and Customs (HMRC) and are based on your Self Assessment tax bill from the previous year.
When making your first payment on the 31st July, you’ll pay the first half of your predicted Income Tax bill alongside your first Class 4 National Insurance payment. On 31st January, you’ll make your second Income Tax payment, as well as your second Class 4 National Insurance contributions and your Class 2 National Insurance contributions for the relevant tax year.
If you have any outstanding tax due, here’s where balancing payments come in. Balancing payments are made when you earn more than expected, and need to pay a certain amount of tax extra to the actual amount owed for that financial year.
When is my balancing payment due?
Your balancing payment is due on the 31st January after your second payment of account instalment. To give you some insight into paying your Self Assessment tax bill, here’s an example of how you’d pay your tax bill for the 2021/22 tax year.
January 2022: You’ve sent off your 2020/2021 Self Assessment return and from that, HMRC generates your Self Assessment tax bill. On it, you’ll have a tax calculation of your predicted tax bill for the current tax year — 2021/22 — and how much you’ll need to pay based on your last Self Assessment.31st January 2022: You make your first payment on account is due.31st July 2022: You make your second payment on account is due.January 2023: You send off your tax return for the 2020/21 tax year and receive your Self Assessment tax bill. You also receive an estimation for your 2022/23 tax bill, kickstarting the payment cycle for the next year.
GOV.UK also provides this example:
After the final step, you’ll be in one of three scenarios:
The predicted earnings match your actual earnings, so there’s no additional tax to pay.
You earned less than HMRC had initially calculated and have overpaid your taxes, meaning you’ll be due a tax rebate.
You earned more than HMRC had initially calculated, meaning you’ve underpaid taxes and will need to make up the difference.
If you’re in scenario 1, you’re all good to go — no further action necessary.If you’re in scenario 2, HMRC owes you money, and you’ll be owed a balancing payment from HMRC.If you’re in scenario 3, you’ll need to submit a balancing payment to finalise your payments for your 2021/22 tax bill.
How to make your balancing payment
You can choose from any of these payment methods:
Direct debitBank transfer or BACS using your debit or credit card (online, telephone banking or at your bank)CHAPS (a faster payment method)By cheque at your post office
To avoid any late payment penalties, be sure to factor in how long it takes for each payment method to clear. Typically this is a few working days, so if you’re short on time CHAPS might be your best bet, as the payment can clear in a matter of hours.
What happens if you can’t pay a balancing payment
It’s always a good idea to set enough money aside for a balancing payment to avoid getting caught out by any late payment penalties.However, things don’t always go according to plan, and you might find yourself strapped for cash when the deadline rolls around. If you don’t think you’ll be able to make the balancing payment by the deadline, contact HMRC to inform them well ahead of time.You can contact HMRC in one of the following ways:
Via your online account. If you’ve filed your personal tax return online, you can log in to your online tax account and select the action that corresponds best to your query. Alternatively, you can request to speak to an HMRC adviser via web chat.Via telephone. Between 8am-6pm Monday to Friday, you can call HMRC on 0300 200 3310.Send a letter to Self Assessment, HM Revenue and Customs, BX9 1AS, United Kingdom.
