Quick guide to preliminary tax in Ireland
Preliminary tax can come as a bit of a shock, especially for those who are new to business. So, what is it and does it apply to you and your business?
Preliminary tax is paid by people who self-assess their Income Tax. This usually applies to people who are self-employed (like business owners) or whose only or main source of income comes from rental income, for example. For a full list of who should register for Income Tax self-assessment, see the Revenue website.
Preliminary tax is a combination of the Income Tax, PRSI, and USC that you expect to pay for the tax year. This is because you may have to pay preliminary tax before your accounting year-end.
For example, if your accounting year is from January 1st to December 31st, you will still have to pay your Preliminary Tax for the full year by October 31st. Because you will not know for sure what your revenue for that year will be yet, you will need to make an estimate.
It’s important that you don’t under-pay your preliminary tax or you may be charged interest.
How do you calculate preliminary tax liability?
You may already be asking the obvious question: if the current tax year is not over, how do I know my income for the year, and therefore how much Preliminary Tax I have to pay? There are a few acceptable methods of calculating this tax.
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.
The most popular way of calculating Preliminary tax is to base it on the previous year’s liability.
For example, if your tax liability for 2020 was calculated at €1,000, Revenue will expect the same amount of Preliminary Tax for 2021. Of course, there are exceptions to this rule, especially if your business is growing quickly.
If you have been in business for a few years, it is likely that you paid Preliminary tax last year. This will reduce the amount you have to pay in the current year.
However, if it is your first year in business, it can feel that you are paying tax twice! It may be small comfort to know that the Preliminary tax you pay will be held by Revenue ‘on account’. This is offset against your tax liability for the next year, reducing the amount you will have to pay.
Please note that non-payment of Preliminary Tax may incur Revenue interest or penalties.
How to file your Preliminary Tax Return?
For Income Tax returns, you must fill out a Form 11. This includes:
- A self-assessment where you provide a breakdown of your income, profits, and costs for the year.
- The amount of Income Tax, Pay Related Social Insurance (PRSI), and Universal Social Charge (USC) you need to pay.
You can fill out a paper form 11 or use the Revenue Online Service (ROS) to do so. When using the ROS for your tax returns, the deadline is usually a little later than the October 31rst deadline we mentioned above.
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, reach out to our Client Services Team. We’re always happy to help.
Larissa is a Fellow Chartered Accountant (FCA) and is the Founder and 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, Northern Ireland and the UK.
Larissa has been shortlisted for the Image ‘Businesswoman of the Year Award’ in 2017 and 2018 and awarded ‘Accountant of the Year’ in 2018. Larissa volunteers as a role model for LEO Donegal’s ‘Ambition’ programme and is a Lead Entrepreneur for ‘ACORNS’ and ‘Going For Growth’ which are development programmes designed to support ambitious female entrepreneurs, and for ‘Back For Business’, a development programme assisting returned emigrants or those planning to return to Ireland to start and develop a business. Accountant Online has won many awards, including ‘Best Small Practice’ in 2017, ‘Best Medium Practice’ in 2018, and in 2020, ‘Medium Practice of the Year’ and ‘Practice of the Year’.