A balancing payment is an individual's final tax payment for a specific tax year. It occurs after the tax year ends, typically on January 31st following the end of the tax year (e.g., for the tax year ending on April 5 2023, the balancing payment is due by January 31 2024)
The balancing payment due will depend on whether you have made payments on account towards the tax year in question:
If you made payments on account towards the tax year you are submitting, the balancing payment due on the 31st of January will be the tax due for the year minus the payments on account you have made. If your tax bill is higher this year than last year, then you will have a balancing payment to make; however, if your tax bill for this year is lower than last year, you will be due a refund for the tax year as you would have overpaid.
If you have not made payments on account towards the tax year you are submitting - the balancing payment due on the 31st of January will be the tax due for the year.
Example 1 - overpayment of tax
John submitted a tax return for 21/22 with a tax bill of £3,000. John paid no tax at source that year, so he was required to make two payments on account of £1,500 each towards the 22/23 tax year. John made these payments on the 31st of January and the 31st of July per HMRC rules.
John is now submitting his 22/23 tax return. His total tax bill for this year is £2,500, and John has paid no tax at source. John's tax calculation would look as follows:
Tax due for 22/23 = £2,500
Payment on accounts made (£3,000)
Balancing payment = £500 refund due for the 22/23 tax year
John would be due to make two payments on account of £1,250 (£2,500/2) towards 23/24.
So, in terms of cash outflows:
31st January 2024 - due a £500 refund from overpaying last year and £1,250 due in payment on account for 23/24. This would net off to a payment of £750
31st July 2024 - £1,250 payment on account due for 23/24
When John later submits his 23/24 return, he will have made £2,500 in payments in advance towards this tax year.
Example 2 - underpayment of tax
Same scenario as Example 1, but for 22/23, John's tax due was £4,000 with no tax paid at source:
Tax due for 22/23 = £4,000
Payment on accounts made (£3,000)
Balancing payment = £1,000 due for the 22/23 tax year
John would be due to make two payments on account of £2,000 (£4,000/2) towards 23/24.
So, in terms of cash outflows:
31st January 2024 - owes £1,000 from underpaying last year and £2,000 due in payment on account for 23/24. This would mean a payment of £3,000 would be due.
31st July 2024 - £2,000 payment on account due for 23/24
When John later submits his 23/24 return, he will have made £2,500 in payments in advance towards this tax year.
Example 3 - no payments on account due the next year
Same scenario as Example 1, but for 22/23, John's tax due was £900 with no tax paid at source
Tax due for 22/23 = £900
Payment on accounts made (£3,000)
Balancing payment = £2,100 refund due for the tax year
John would not be required to make any payments on account as his tax bill is not greater than £1,000.
So, in terms of cash outflows:
31st January 2024 - John would receive a rebate of £2,100
No other payments are needed.
When John submits his 23/24 return, he will not have made any payments on account towards this tax year.
Conclusion
Balancing payments and payments on account are integral components of the UK self-assessment tax system for individuals. It's crucial to understand these concepts, calculate your tax liability accurately, and make payments on time to avoid penalties and interest charges. By being aware of how these payments work and considering potential changes in income, individuals can better manage their tax obligations and financial planning.
Discussing these concepts with an accountant is always advisable, as the examples above are simplified to aid understanding of this complex topic. Accountants are also best placed to help advise regarding reducing payments on account and providing advice around managing the cash flow implications of payments in advance of tax.