Making Tax Digital · Sole traders
What is a balancing payment and how does it fit into quarterly updates?
ONLY£15A MONTHQuarterly updates and tax payments follow different timetables.
Quarterly updates and tax payments follow different timetables. The balancing payment is the amount still due after the year's final liability is compared with tax already paid towards it. Sending four updates does not mean paying four equal instalments of Income Tax.
Understand the annual calculation
HMRC's payments-on-account guidance explains the advance-payment system and its exceptions. Payments on account are usually two instalments based on the previous year's relevant liability, due in January and July.
When the actual liability is known, any remaining amount is normally due by the following 31 January. That date may also bring the first payment on account for the next tax year. The combined bill can therefore be larger than the balancing payment alone.
Not every taxpayer has payments on account. The amount and proportion already collected at source matter. Capital Gains Tax and student-loan repayments are not simply folded into the same prior-year instalment base in the same way as relevant Income Tax and Class 4 NIC.
Worked example: the two parts of January
Assume a relevant annual liability of £8,000 and £6,000 already paid on account. The balancing payment is £2,000. If the next year's first payment on account is £4,000, the January amount is £6,000 in total, before any other adjustments.
The £6,000 is not evidence that the prior year's liability suddenly rose to £12,000. It combines a prior-year balance with an advance payment for another year.
Treat a tax estimate as a forecast
A bookkeeping profit is not necessarily your final taxable income, and an estimated liability is not always the amount still to pay. Employment income, pensions, savings, reliefs, tax already deducted and payments on account can all affect the final position.
An estimate is most useful when you understand its coverage. Check whether it uses year-to-date figures or projects a full year, whether all income sources are included and whether adjustments are still outstanding. A strong summer followed by a quiet winter should not automatically be projected as twelve identical months.
HMRC explains that estimates after quarterly updates can be incomplete when other income is missing or accounting periods do not align with the tax year. Read the estimate guidance within quarterly reporting.
Use a reviewed forecast to inform a cash reserve, then compare it with actual HMRC liabilities and payment dates. If you transfer money into a tax savings account, that transfer is not a business expense. If an estimate changes sharply, investigate the records and assumptions before assuming that your tax position itself has changed by the same amount.
Keep the reporting dates separate from payment dates
The standard first update for 2026/27 covers 6 April to 5 July 2026 and was due by 7 August 2026. The second covers 6 April to 5 October 2026 and is due by 7 November 2026. The third and fourth deadlines are 7 February 2027 and 7 May 2027. These are cumulative updates, not four isolated sets of three-month totals.
Calendar periods have different cut-offs and the same filing deadlines. Check the setting for each business rather than assuming the dates from a bank statement. HMRC lists both reporting calendars.
The annual return for 2026/27 is due by 31 January 2028. The earlier 2025/26 return normally remains due online by 31 January 2027. Keeping those years distinct avoids a common transition-year misunderstanding.
Payments on account, where required, follow their own January and July timetable. An update acknowledgement confirms a reporting event; it does not confirm that an outstanding tax bill has been paid. Check your actual HMRC account and payment obligations separately from the software's progress indicators.
Keep the evidence connected to the figures
Your digital record should explain the amount, date and nature of the transaction. Keep the invoice, receipt, statement or other evidence that supports it. A photograph can make a paper document easier to retain, but a folder of photographs alone does not create complete transaction records.
For sole traders, HMRC normally requires business records to be kept for at least five years after the relevant 31 January filing deadline. Keep them longer where the rules for a late return, enquiry or other circumstances require it. Check the record-retention guidance.
Make the records usable by your future self. Include a short explanation where a bank description is vague, retain the calculation behind a business-use split and make corrections traceable. For a missing receipt, try the supplier account, email confirmation or a replacement invoice before relying on incomplete evidence.
At review time, compare your records with the bank or payment account and investigate differences. Equal totals are useful, but two errors can cancel each other out. A sample of individual transactions can reveal a duplicated purchase or an omitted customer receipt that a totals-only check misses.
Plan from the actual bill
Check tax years and payment labels in your HMRC account. Compare estimates with instalments already paid and keep a separate tax reserve. If income falls, consider HMRC's process for reducing payments on account, understanding that reducing them too far can lead to interest.
Take the next step
Avona.app offers a self-service route from £15/month. Bring your records together, review the figures and choose a workflow that fits your business. For professional help, discuss the scope and total price of Avona Concierge, managed by chartered accountants, before choosing a service.