What is Preliminary Tax and why do I have to pay it???
Preliminary Tax is an estimate of the amount of Income Tax you owe for the current tax year. Many people don’t realise why they have to pay preliminary tax so we'll try and explain as follows:
As a self-employed tax payer, the deadline for paying your income tax for 2015 is the 31st October 2016. This means that 10 months into 2016 a self-employed person has yet to pay any income tax. Compare this to the PAYE worker who pays their taxes every month and it appears to give a cash flow advantage to the self-employed. To recover some income tax on the 10 months of income, Revenue require self-employed persons to make a preliminary tax payment when they file their 2015 tax return. However, since the self-employed don’t know what their final profit for 2016 will be, revenue gives them a choice.
90% of your final liability for the current tax year, or
100% of your final liability for the previous tax year – (most popular)
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)
Since most self-employed tax payers don’t know for certain what their final tax liability for 2016 will be, they can’t reliably estimate 90% of their final liability so they choose Option 2 and pay 100% of the previous year.
Preliminary tax is paid when you submit your Form 11 Income Tax Return which is why many people think they are paying "on the double" when in fact they are paying the balance for 2015 plus the tax that they would have paid for 2016 if they were a PAYE worker, so that cash flow advantage that they had over the PAYE worker is quickly eroded because they have to make a lump sum payment to revenue.
If you need to discuss your preliminary tax or any type of revenue payment arrangement, feel free to contact us for a detailed walkthrough.