Preliminary tax: What self-employed taxpayers need to know

Got to sort your self-assessment tax return and discovered you need to pay preliminary tax but don’t know where to start?

As a self-employed small business owner, you’re responsible for filing and paying your own taxes each year under the self-assessment system.

The tax year runs from 1 January to 31 December and the deadline for filing your tax returns is 31 October of the following year.

This deadline is extended for those who pay and file via Revenue Online Service (ROS). It’s a specific date in mid-November – announced on the Revenue website earlier in the year. For 2023, it’s 15 November.

You must also pay preliminary tax for the current year when filing returns for the preceding year.

This article will explain what preliminary tax is, how it relates to self-assessment tax returns, and how and when payments must be made.

Here’s what we cover:

• What is preliminary tax?
• When does preliminary tax have to be paid?
• How is preliminary tax calculated?
• An example of how preliminary tax works
• How to pay preliminary tax
• What happens if preliminary tax isn’t paid?
• Final thoughts on preliminary tax

What is preliminary tax?

Preliminary tax is an estimate of the amount you expect to pay for the current trading year, including income tax, Pay Related Social Insurance (PRSI), and Universal Social Charge (USC).

You must file and pay taxes for the preceding year by 31 October of the current year or avail of an extension if filing and paying through ROS.

While you are filing and paying for the previous year, you must also pay preliminary tax for the current year.

When does preliminary tax have to be paid?

This tax must be paid for the current trading year when filing and paying your tax return for the preceding year.

For example, you must pay and file your tax return for 2022 by 31 October/15 November 2023. At the same time, you must pay preliminary tax for 2023.

The exception to this rule is if you’re in your first year of trading.

How is preliminary tax calculated?

It’s an estimate of the tax liability expected for the current year. To calculate your amount of tax, you must select one of the following:

(Note: The estimate must be equal to or greater than the lowest amount.)

• 90% of the tax due for the current year
  or
• 100% of the tax due for the previous tax year
  or
• 105% of the tax due for the tax year preceding the previous tax year.

Note: Option 3 is only applicable to those who pay by direct debit.

Unless your business has had an exceptional year with revenue expected to have increased significantly, it’s generally most straightforward to pay 100% of the previous year.

When it comes to filing and paying next October, you’ll pay the difference between the preliminary tax paid and the actual tax due when returns have been filed.

Similarly, if income has fallen considerably in the current year compared to the previous year, you might consider the first option – 90% of the current year’s tax.

An example of how preliminary tax works

Under the self-assessment system, you’re obliged to pay and file your taxes by 31 October each year or as explained above, on a specified date in November.

Unless this is your first year in business, you must do the following on or before the tax filing deadline:

• File your tax return for the previous year
• Pay any balance of tax due for the previous year (actual tax liability less preliminary tax paid)
• Pay preliminary tax for the current year.

It’s worth noting that in your first year in business, you’re not required to submit a tax return that year. The tax return is due the following 31 October – or mid-November if submitted via ROS.

So, for example, if you started your business in 2022, you must submit your first tax return by 31 October/mid-November 2023. You must also pay preliminary tax for 2023 at the same time.

You don’t need to file a tax return for the current year when paying the preliminary tax.

For subsequent years, you must pay the balance of the tax due for the previous year less the preliminary tax paid. You must also pay the preliminary tax due for the current year.

Let’s look at an example:

Ann starts a business in 2020. In October 2021, she files her tax return for 2020 and pays taxes of €4,000 for 2020 and at the same time, she pays preliminary tax for 2021.

She can choose to pay €4,000 (100% of the preceding year’s liability) or 90% of the current year’s taxes (this requires accurately assessing the current year’s entire income and may not be practical at this time).

If she chooses option 1, she’ll be paying €4,000 + €4,000, equalling a total of €8,000.

In October 2022, Ann will need to file and pay the balance of tax due from 2021 (actual tax due less preliminary tax) and preliminary tax for 2022.

How to pay preliminary tax

You can pay the tax through Revenue Online Services by:

Paying by debit or credit card

• Select the ‘MyServices’ section from the main menu
• Click on ‘Payments & Refunds’ and select the payment type
• Choose the tax type – in this case, ‘Income Tax’
• Choose ‘Make Payment’ and select the relevant tax period.

ROS Debit Instruction

Payments can also be made via a ROS Debit Instruction (RDI), which allows you to register your bank account details to make one-off payments to Revenue.

Once this is set up, it’ll allow you to make payments on demand; you can choose the payment amount and date of payment.

Direct debit instruction

You can also set up a direct debit instruction through ROS, which will allow you to make monthly payments for current taxes.

For more details on setting up a RDI or a direct debit, visit the Revenue website.

What happens if preliminary tax isn’t paid?

If you fail to pay your tax on time, you might be charged penalties, interest and surcharges. Interest is charged at a daily rate of 0.0219% and a surcharge of 5% to 10% may be applied.

If 2023 is your first year in business, you’re not liable for preliminary tax.

Final thoughts on preliminary tax

Paying preliminary tax is not overly complicated.

However, it’s a large financial outlay to pay towards the end of the year when your business has other overheads, so it’s advisable to prepare well in advance.

So, while in your first year of business, you will not have to submit a tax return or pay preliminary tax, it would be advisable to put a certain sum aside each month – for example, 35% of income – in preparation for the double payment in the second year of business.

Likewise, in subsequent years, it makes sense to continue to set aside a portion of your income each month so you can easily pay the lump sum when it becomes due.