The Balancing Payment is part of the Payment on Account process, due by 31st January when you pay your tax bill. When you start out as self-employed, you’ll be taxed more than usual in your first year. You’ll be charged for the full tax year that you’ve just worked and then HMRC will also take an advance payment for the tax year that you’re currently in.
Put simply, the first time you pay through Payment on Account, you’ll get a tax bill for 150% of what you were expecting. 100% is for the tax year that just ended; the remaining 50% is half of the advance payment for the current tax year.
As the advance tax bill is based on your previous year’s earnings, you might have to reconcile anything that you overpay or underpay. If you earn £30,000 in the 2021/22 tax year, for instance, your upfront payments for the 2022/23 tax year are based on this amount.
But if you actually earn £40,000 in the 2021/22 tax year, you’ll owe extra tax in January to reconcile your advanced bills. This is the same if you earn less than projected. HMRC will refund you in January for what you were overcharged.
The process of reconciliation is known as the balancing payment.
When you first start your business, there’s a lot to navigate with your accounts, so let our team help you get set up! Our experts are well versed in Balancing Payments and accounting, so contact us today.
Of course! We advise that you start a comprehensive spreadsheet to keep track of your taxable income and relevant expenses throughout the year in order to make your tax return more straightforward. This can be done on an Excel spreadsheet or Google sheet to keep things simple! Contact our team for more advice today!