Preliminary tax is something that everyone paying tax needs to be aware of. Preliminary tax is an estimate of the tax, PRSI and USC that you expect to pay for a tax year. It must be paid by the November of the tax year in question (basically by the tax return deadline for the previous year). The aim is to ensure a taxpayer is paying tax on their income in the year that income is earned. However, the first year that you are paying preliminary tax does feel like you are paying tax on the double.
I think it is easiest explained by using an example. Let’s say you started your business in February 2021. By 12th November 2022, you will have to submit your income tax return for 2021, pay your tax liability for 2021 and pay your preliminary tax for 2022.
Revenue rules
Revenue has certain rules around the level of preliminary tax that must be paid. It must be equal to, or greater than, the lowest of the following:
- 90% of the current tax year (2022 in my example)
- 100% of the previous tax year (2021 in my example)
- 105% of the pre-preceding tax year (2020 in my example). Only applicable if you pay by direct debit and the tax liability for this year cannot have been zero.
I normally advise clients of what their preliminary tax should be – this isn’t something that a client would need to work out themselves. I usually wouldn’t do a current year estimate unless there was a big change in the business during the year as it is too time-consuming. Most clients end up paying 100% of the previous tax year.
When starting a business
Generally speaking, you do not need to make payment in year one of starting a business (2021 in my example) so it isn’t something you need to do immediately. The first preliminary tax payment will be done with your first tax return.
Penalties for non payment
There are penalties for not paying adequate preliminary tax and interest does accumulate on the liability too so it is important to be aware of what you need to do around preliminary tax if you are submitting your returns yourself. If you have an accountant, they will advise you.
How to pay
Preliminary tax can be paid through ROS or Revenue’s MyAccount for those not registered for income tax. Further Revenue guidance can be found here.
Example
Year One of business
Year One is 2021 with tax return due by November 2022.
If your tax liability is €1,500 for 2021, then you will be paying €3,000 (€1,500 for 2021 and €1,500 for 2022) across to Revenue in November 2022.
Year Two of business
Year Two is 2022 with tax return due by November 2023.
If your tax liability is €2,000 for 2022, then you will have the options of paying either €2,000 (100% of the previous year) or €1,575 (105% of the pre-preceding year). You also get the credit of having paid €1,500 in preliminary tax already. Therefore assuming you go with the lowest amount, you would be paying €2,075 to Revenue in November 2023 (2,000+1,575-1,500). The effect of the double payment is mostly felt in the first year and then following years are reduced by the amount paid.
Disclaimer: This post does not constitute financial advice and is for information and educational purposes only. This blog does not constitute an accountant/client relationship.
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