Balancing Payment

The Balancing Payment is part of the Payment on Account process, due by 31st January when you pay your tax bill. 

If you’re self-employed (and at least 20% of your earnings are not taxed via PAYE), you need to pay Income Tax in advance through Payment on Account:

• Half by 31st January (the usual Self Assessment tax return deadline)
• Half by 31st July 
• Anything that you overpaid or underpaid from the previous year’s payment will be balanced the following January

I’m a first time freelancer

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. 

For example, in the 2024/25 tax year, you would owe:

• 31st January 2026
  • Tax on your 2024/25 earnings 
  • 50% of your 2025/26 earnings up front (estimated based on your 2021/22 earnings)
• 31st July 2026
  • 50% of your 2025/26 earnings (estimated based on your 2024/25 earnings) 
• 31st January 2027
  • Anything overpaid or underpaid based on HMRC’s estimation is reconciled (refunded or paid) 

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.

How does the balancing payment work?

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 2024/25 tax year, for instance, your upfront payments for the 2025/26 tax year are based on this amount. 

But if you actually earn £40,000 in the 2025/26 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.