Preliminary tax- can't get my head around it.

L

Larry33

Registered User
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6
Hi all,

Hopefully a straightforward question regarding preliminary tax.

I've set up as a sole trader, with my first income this week. PAYE employee previous to that date. I'm aware the deadline for tax self-assessment is 31/10/20.

Am I right in saying that I am exempt from preliminary tax this year?

That is to say, I can keep my money for now and settle up with the revenue in October 2021? Or have I completely misinterpreted how the system works?

Thanks in advance!
 
I think you need to pay 90% of the tax you paid in 2019
or
Estimate how much income tax will be due for 2020 (from your employment and sole trader) and pay that

As a sole trader your income from the business is treated like your PAYE income - ie it is all added together. When calculating how much is due, you can deduct the tax already paid under PAYE

However - this is my interpretation of the rules and I could be wrong
 
Ok. OP you’re on the right track.

Preliminary tax is the amount of tax you pay for a given year in a given year. E.G. you pay 2020 Preliminary Tax on 31 October 2020.

It’s based on either: 100% of the tax you paid the previous year, or 90% of the estimate of tax for the current year.

See:

What is preliminary tax?

This page utlines what preliminary tax is.
www.revenue.ie www.revenue.ie


If you’ve started off in business in 2020, then your Preliminary Tax for 2020 as a new sole trader will, if you choose, be €0 as you weren’t trading the previous year (so the previous year’s tax will be nil).

But be prepared for the double whammy in October 2021 as your tax bill will be based on the actual tax bill for 2020 (which by then you will know) plus 100% of that amount, being the rate calculated for 2021, being 100% of the previous year.

Check the link. I’ve just been through it and was in clover the first year but in year two, was sore as I’d to pay on the double.
 
It should be pointed out that, afaik and I'm not an accountant, preliminary tax is either 100% of the previous year or 90% of the actual figure for the year in question. So if you expect not to earn a lot in 2021 when filing the 2020 return as long as the prelim is 90% of the actual tax owed for that year (2021) there will be no penalty. Given that you are making a return for that year 3/4 way through it you should be able to make a call on it. I'd imagine that this year COVID will have cut taxable earnings considerably.

Note: I am not an accountant.
 
This is grossly unfair. What if ones non PAYE income is way down this year,
say with delinquent tenants, or reduced investment income.
 
I've no problem paying tax bill each year, but I'm struggling to pay two years tax in one go to be honest. It's crippling. And the threat of 8% interest isn't fair either.
 
How so?

You have collected the actual money!

I earned €100 in 2019...I owe €50, but I don’t have to pay it until November 2020.

I expect to earn €120 in 2020; I now owe €50 preliminary tax in relation to that (i.e. 100% of the prior year liability) but it’s November 2020 so the year is nearly over and I have the money.

And if 2020 is a horror show and my income has fallen to, say, €70, I can base my preliminary tax payment on 90% of the liability on €70, let’s call that €35, so net €31.50.

It seems very fair to me.

The problem is people spend the money!
 
Gordon Gekko said:
The problem is people spend the money!
Click to expand...
The key is to provision for income tax, on a periodic basis, if self employed.

So, as a rule of thumb, if you make €10,000 in the month (after costs), put €5,000 of it aside for tax.

Not rocket science.
 
Does preliminary tax cover exit tax also (ie where you have to pay it yourself - ETFs etc - rather than where institution pays for you)? I looked it up. It didn’t look like it but would be interested in other views. Thanks in advance.
 
Preliminary income tax covers all of the tax due on your income - whether the income is earned or unearned eg rental income, investment income
 
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