Preliminary tax is the payment on account that Irish companies and self-employed people make to Revenue before their tax return is filed. This guide covers who has to pay it, how much is enough to avoid interest, the first-year exemption, the due dates for companies and for sole traders, and what to do if you cannot pay on time.
What is Preliminary Tax
Preliminary Tax is essentially a pre-payment of the tax that you expect to owe for the following year. It acts as a method to ensure that taxpayers are paying their tax liabilities as they earn income throughout the year, rather than in one lump sum. This system not only aids the Revenue in maintaining a consistent inflow of tax revenue but also helps taxpayers by spreading their tax liabilities over a more extended period, thereby potentially alleviating any large end-of-year tax bills.
Who Pays Preliminary Tax in Ireland
The obligation of paying Preliminary Tax in Ireland falls on a wide spectrum of taxpayers including self-employed individuals, corporations, and individuals receiving income where tax cannot be deducted at source. In a nutshell, if you’re an entrepreneur running a business, the odds are that you will need to pay Preliminary Tax.
How Much Preliminary Tax Do I Have to Pay
The amount of Preliminary Tax you are required to pay hinges on several factors including your income level and the nature of your business. Usually, the Preliminary Tax should be equal to or exceed the lower of:
90% of the tax due for the current year, or
100% of the tax paid in the preceding year, or
105% of your final liability for the pre-preceding tax year.
(This option is only available where preliminary tax is paid by direct debit and does not apply where the tax payable for the pre-preceding year was nil).
If you’re looking for assistance in calculating and paying your Preliminary tax obligations, contact Chern & Co experts. We are an authorised Tax Agent with Revenue of Ireland. Our accounting team will ensure your business remains compliant, while you focus on steering your venture towards achieving its goals.
Preliminary Tax for New or Startup Companies
The first year of trading often comes with a whirlpool of financial obligations, and Preliminary Tax is one of them. New or start-up companies do not have to pay preliminary tax for their first accounting period if they have Corporation Tax that is less than €200,000. This is excluding surcharge but including Income Tax payable under Section 239 TCA 1997. Instead, they must pay their final Corporation Tax charge for the first accounting period when submitting their Corporation Tax return.
Even though typically, there isn’t a specific requirement to pay Preliminary Tax in your first year of trading, any other tax due will need to be settled by the normal due date.
Preliminary Tax for Companies: Small and Large
For Corporation Tax, Revenue treats a company as small if its Corporation Tax liability for the previous accounting period was not more than €200,000. The rules differ by size:
- Small company: one instalment by the 23rd day of month 11 of the accounting period (the 21st if you do not pay through ROS). It must cover 90% of the liability for the current period or 100% of the liability for the previous period.
- Large company: two instalments. The first, in month 6, must be 45% of the current period liability or 50% of the previous period liability. The second, in month 11, must bring the total up to 90% of the current period liability.
- New company: no preliminary tax for the first accounting period if the Corporation Tax for that period is not more than €200,000. The full amount is paid with the CT1 return.
Any balance is due with the Corporation Tax return, by the 23rd day of month 9 after the end of the accounting period. If you want this worked out and filed for you, see our Corporation Tax return service.
Preliminary Tax Ireland Due Date
The due dates for Preliminary Tax are contingent on the financial year of your business. For individuals, the due date for Preliminary Tax is generally on or before 31st October of the tax year. For companies, the date depends on size and on the accounting period: a small company pays one instalment in month 11 of its accounting period, and a large company pays in two instalments, in month 6 and month 11 (see the section on companies above).
Failure to pay your Preliminary Tax by 31 October, adhere to your direct debit arrangement, or pay an adequate amount in Preliminary Tax could result in an interest charge. The deadline for paying your complete tax liability or any remaining tax balance reverts to the due date of the Preliminary Tax, specifically 31 October of the respective assessment year. As section 1080 of the Taxes Consolidation Act stipulated, interest will be applied to late tax payments for each day or part thereof, at the applicable rate.
Preliminary Tax for Sole Traders in Their First Year
A sole trader in the first year of trading has no previous year to base preliminary tax on, so in practice there is no preliminary tax for that first year. The tax for year one is paid by 31 October of the following year, together with the Form 11 return.
On that same date the preliminary tax for year two also falls due. This means the second October usually brings two payments at once, so it is worth setting money aside during the first year. Our Form 11 filing service can plan this with you.
What to Do if You Cannot Pay Preliminary Tax
If business is slow and you cannot pay preliminary tax in full, do not simply skip the payment. Interest under section 1080 TCA 1997 runs for each day the tax is late, and an unpaid liability can affect your tax clearance.
- Pay what you can by the due date: interest is charged only on the shortfall.
- Check whether the 100% rule (last year’s liability) gives a lower amount than 90% of this year.
- Ask Revenue for a phased payment arrangement through ROS or myAccount before the due date.
- If your income has dropped, base the payment on a realistic estimate for the current year and keep your working papers.
Wrapping Up
Preliminary Tax, acting as a pre-payment mechanism, serves to streamline the process both for the state and the taxpayers, ensuring a steady revenue flow and manageable payment structures for businesses and individuals alike. It’s paramount that entrepreneurs, self-employed individuals, and corporations grasp the workings of Preliminary Tax, its computation, and deadlines to avoid any inadvertent financial pitfalls and ensure smooth operations.
Disclaimer: The content of this page is for acquainting purposes only and is subject to change. It does not constitute any professional advice. No liability is accepted by Chern & Co for any actions taken or not taken in reliance on the information set out in this article. Professional, legal or tax advice should be obtained before taking or refraining from any action
