Understanding Balancing Payments & Payments on Account

A 'balancing payment' and a 'payment on account' are not the same, but they are concepts related to the UK tax system. Both are part of the process of managing your tax payments with HMRC. Here we explain the difference:

Balancing Payment to HMRC

A balancing payment is the amount you may need to pay at the end of the tax year to settle any outstanding tax liability. It takes into account your total tax liability for the year and subtracts any payments you’ve already made, such as through PAYE or other means. If the total tax liability is higher than the payments made, you’ll need to make a balancing payment. Conversely, if you’ve overpaid, you may be eligible for a tax refund.

Payment on Account to HMRC

Payments on Account are a way for HM Revenue and Customs (HMRC) to collect tax payments in advance, made during the current tax year for the following year, based on estimated future tax liability.

How do Payments on Account work?

1. Income Assessment: When you submit your tax return, HMRC calculates the tax you owe for the current tax year.

2. Payments on Account: If your tax liability is over a certain amount, HMRC may ask you to make Payments on Account for the next tax year. This is essentially a way of pre-paying part of your tax bill for the following year.

3. Timing of Payments: Payments on Account are due in two instalments. The first payment is due by January 31st of the current tax year, and the second is due by July 31st of the same tax year.

4. Calculation: Each payment is typically half of your estimated tax liability for the current tax year.

Why do HMRC use the Payments on Account system?

The idea behind Payments on Account is to help you manage your tax payments more evenly throughout the year, especially if they have income sources that aren’t subject to regular tax deductions. However, it’s important to note that these payments are based on estimates, and your actual tax liability for the next year could well be different.

If your circumstances change, and you expect your income to be lower in the next tax year, you can apply to reduce your Payments on Account. If your income is expected to be higher, you may need to increase your Payments on Account to avoid a larger balancing payment later.

It’s advisable to consult with a tax professional or contact HMRC directly if you have specific questions about your Payments on Account.

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