What is Preliminary Tax and Why is it So Important?
If you have an income tax return to complete, then preparation for preliminary tax is essential. It’s important because you must pay it in advance of the following tax year — and there are penalties if you don’t. This might sound daunting at first, but it’s actually quite straightforward. Here we look at what exactly preliminary tax is, what you need to consider, and how to pay it quickly and easily.
CONTENTS
What is Preliminary Tax?
How Much Should I Pay?
Benefits and Challenges
What to Pay and How to Pay it
Talk to The Professionals
What is Preliminary Tax?
Preliminary tax is an estimate of the tax you are expected to pay for the current tax year. This estimate combines Income Tax, Pay Related Social Insurance (PRSI), and Universal Social Charge (USC).
The 31st of October is the tax payment deadline for any given tax year. At the same time, you also make a preliminary payment for the following tax year.
How Much Preliminary Tax Should I Pay?
As a taxpayer with non-PAYE income, you don’t pay any tax until 31 October of the following year. Meanwhile, your PAYE friends are paying taxes every month. To balance things up, tax returns for the self-employed include an estimate of the tax you expect to pay for the year.
The estimated amount can be 90% of your final liability for the current tax year; however, most people find it easier to simply pay 100% of their final liability for the previous tax year, as it’s easier to estimate given you already have a figure to reference it against.
Benefits and Challenges
Benefits
By paying your preliminary tax, you remain fully tax compliant and will avoid any penalties. Generally, your preliminary tax payment will cover your liability for the tax year.
Challenges
In the first year of business, paying preliminary tax can be a significant lump sum, essentially double your tax liability. This means you should have the money to hand. Our tax experts recommend that you set aside at least 35% of your income to cover your tax liability, however, all savings may not be needed.
What to Pay and How to Pay it
If you are self-assessed for income tax, there are various payment options for preliminary tax. Before October 31st, you must pay an amount that is at least one of the following:
- 90% of the tax due for that year
- 100% of the tax due for the preceding year (most popular option)
- 105% of the tax due for the pre-preceding year (if paying by direct debit)
Talk to The Professionals About Your Preliminary Tax
While the above may look complicated, it is actually rather straightforward, especially with the help of our expert team here at Tax Return Plus who are standing by to help you with your self-employed taxes if you need it. A standard tax return with us starts from just €249 (VAT incl.). Get a quote today or contact our expert team to ensure you pay the taxes you owe and no more.