Preliminary tax and start-ups

What is it?

Preliminary tax applies to self-assessed tax payers and companies. This article deals with preliminary tax for humans as opposed to companies.

Preliminary tax is a payment of income tax in advance or on account. It must be paid on or before 31 October of the year to which it relates, eg the preliminary tax for 2011 must be paid on or before 31 October 2011.

How much do I pay?

You have a (limited) choice:

  1. 90% of the final liability for year to which it relates
  2. 100% of the final liability for the previous year, eg for 2011 preliminary tax pay 100% of the 2010 liability (but see below)
  3. 105% of the pre-preceding year’s final liability if you’re paying by direct debit

Most small businesses choose option 2. If you do you must make certain adjustments:

  1. If you claimed BES, seed capital or investment in films relief in the previous year you must recalculate the previous year’s liability as if you didn’t have those reliefs
  2. For 2011 you must recalculate your 2010 liability as if the income and health levies didn’t exist and the universal social charge (USC) did.

Very good, but I started trading this year and have no idea what my tax bill will be

The same rules apply as above. If you go with option 2 then your previous year’s tax bill was nil. You can still choose option 2 and pay 100% of nil, which is of course nil.

Revenue recommends that, in the interests of cash-flow, you make some sort of payment. This should ease the burden in the following year. But they would say that. My view is that the cash is better in your own pocket for as long as possible. However, I do recommend that you set something aside in a separate deposit account.

I started trading last year and made a loss – what should I base my preliminary tax payment on for this year?

The same applies as above – the previous year’s liability was nil so this year’s preliminary tax can be based on that.

 

As you can see it can get very confusing! Revenue has been very helpful for 2011. For those using the ROS offline application, Form 11 (income tax return) will calculate the preliminary tax for you.

Need to know more about filing tax returns? Click here or contact us here.

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