What is Preliminary Tax?
Preliminary Tax is an estimate of the Income Tax, Universal Social Charge (USC), and Pay Related Social Insurance (PRSI) that you anticipate owing for a specific tax year. It’s important to note that this is only an estimation because you must pay it before your accounting year-end.
Preliminary Tax is obligatory and self-assessed in Ireland. By making this estimated payment, you can proactively contribute to your tax liability and fulfil your tax obligations on time.
It can initially seem daunting, particularly for new business owners. However, it presents a valuable opportunity for proactive financial planning and smooth tax management. With the proper guidance and resources, new business owners can confidently navigate the process and stay on top of their tax obligations. Embracing this aspect of financial responsibility can lead to a strong foundation for long-term business success. In this guide, we will explain how to calculate Preliminary Tax and how to pay Preliminary Tax in Ireland.
Who pays Preliminary Tax?
Self-employed individuals or directors, business owners, and those who rely on rental income or investment and foreign income as their primary sources of income must pay Preliminary Tax to Revenue each year.
On the 31st of October each year, you will settle any underpayment of Income Tax for the previous year, along with the Preliminary Tax estimate for the current year. For instance, on the 31st of October 2023, you would pay any remaining balance of your 2022 Income Tax and your Preliminary Tax for 2023.
In the first year of your business, you may feel your tax bill has doubled since you must pay both taxes in full. However, the Preliminary Tax portion is held “on account” by Revenue and will be offset against your income tax liability for the following year.
Remember, Preliminary Tax is a recurring annual obligation and must be calculated and paid annually as long as you actively trade. It’s a necessary part of managing your tax responsibilities and contributing to the smooth operation of your business finances.
Do you have to pay Preliminary Tax?
Yes, you must calculate and pay Preliminary Tax when trading in Ireland.
Like a missed Income Return deadline, failure to file and pay your Preliminary Tax can lead to interest, penalties, and surcharges, so we advise you to meet your Preliminary Tax obligations to avoid any financial repercussions.
If you fail to pay Preliminary Tax on time, Revenue will charge interest on your tax from the due date. Revenue calculates the interest rate at a daily rate of 0.0219%.
Fulfilling your Preliminary Tax responsibilities enables you to maintain a compliant and financially stable position while trading in Ireland. If you have any uncertainties or need assistance calculating your tax obligations, consider seeking advice from an accounting professional to ensure accuracy and timely payments.
When is Preliminary Tax due in Ireland?
Preliminary Tax for individuals is due on the 31st of October
To clarify, if your accounting year runs from the 1st of January to the 31st of December, you'll still need to pay your Preliminary Tax for the entire year by the 31st of October. Since you may not have your exact revenue for the year yet, you'll have to make an estimation.
For companies, Preliminary Tax is due on the 23rd day of the 11th month of their accounting year
For instance, for a company with a year-end on the 31st of December 2023, the Preliminary Tax is due on the 23rd of November 2023.
How to calculate Preliminary Tax liability
To calculate your Preliminary Tax liability, you have a few methods to choose from, as it needs to be determined before your tax year ends and the final tax amount is known.
Before the 31st of October, you must calculate and pay the lowest amount of the following:
- 90% of the tax liability due for the current year
- 100% of the tax due for the previous tax year
- 105% of the tax due for the year before that. The 105% tax payment only applies when you pay by direct debit and where the tax for that year was not nil.
Most of our clients calculate their Preliminary Tax based on the previous year’s liability. For example, if your 2022 tax liability was €1,000, Revenue will expect the same amount of Preliminary Tax for 2023. Using this method rather than 90% of the current year’s tax liability ensures you have not underpaid your Preliminary Tax.
How to file your Preliminary Tax Return?
For Income Tax returns, you must fill out Form 11.
- A self-assessment where you provide a breakdown of your income, profits, and costs for the year.
- You need to pay the amount of Income Tax, Pay Related Social Insurance (PRSI), and Universal Social Charge (USC).
You can complete a paper form 11 or use the Revenue Online Service (ROS). Alternatively, you can have an agent, such as Accountant Online, file your Form 11 on your behalf. For help figuring out what services you need for your business, contact our Client Services Team. We’re always happy to help.
How to pay Preliminary Tax on ROS
To pay your Preliminary Tax, you can use your ROS online portal, which allows you to submit payments to the Revenue. You can pay the balance of Income Tax and Preliminary Tax through the ‘submit a payment’ tab and select the corresponding year from the drop-down menu.
It’s essential to avoid underpaying your Preliminary Tax to avoid incurring interest charges. To ensure accuracy, consider seeking professional advice or using reliable tools for managing your accounts online. This way, you can plan and budget more effectively for your tax obligations.
Larissa is a Fellow Chartered Accountant (FCA) and is the CEO of Accountant Online, which specialises in company formation, company secretarial, annual accounting services, bookkeeping, tax, and payroll services for micro and small companies in Ireland and the UK.