A balancing charge is something HMRC uses to make sure that you don’t claim too much tax relief for a piece of equipment.
If you’re self-employed and you buy a piece of equipment (like a laptop or a car), you can claim capital allowances like the “annual investment allowance” (AIA) for the cost of that item.
If you later sell it, you might need to add a balancing charge to your profit.
Example of calculating the balancing charge if you’re self-employed:
- let’s say you’re self-employed and bought a laptop for work
- you paid £2,000 for it, and you also claimed AIA worth £2,000
- the “tax written down value” of the laptop is now £0: the price minus the AIA that you just claimed
- four years later you sold the laptop on eBay for £500. This is more than the “tax written down value”, so you’ll have to add a balancing charge to your profit, and then pay tax on it
- you will calculate the balancing charge by adding the amount you sold the laptop for (£500) to the amount of capital allowances you claimed (£2,000), and then subtracting that figure from the amount you bought the laptop for (£2,000)
- (£500 + £2,000) – £2,000 = £500 balancing charge.
You’ll need to add this £500 to your taxable self-employment profit in your Self Assessment tax return.