Preliminary Tax: What is it & when do I have to pay it?

Preliminary Tax – What is it, and when do I have to pay it?

A question we have been asked by many of our clients this year, so we will try to explain what it’s all about.

What is it?

Preliminary tax is your estimate of income tax that you expect to pay for the current tax year. So, we are in 2018, we must pay the estimated amount by 31st October 2018.  The problem is in the first year you have to submit your tax return, it seems like you have to double pay your tax liability.

Probably best to explain with an example:

So, you start being self-employed as a Director of one of our umbrella companies in January 2017 and it comes to October 2018 and your tax return is now due.  You receive your computation, and you have a liability to pay, as you have some rental income/trade income/deposit interest income etc.

You now have to pay your liability of tax for 2017, but the stinger is, you also have to pay preliminary tax for your 2018 estimate of tax at the same time.

In an ideal world, when we are receiving our income during 2017, we will be putting away some funds to cover your liability for 2017, and then in 2018 we will do the same, so when you are hit with the prospect of the “double liability” in October 2018 you are all set to make that payment.

Then next year, when it comes to filing your 2018 tax return, you will only have to pay the balance of the tax due for 2018 (i.e. your 2018 Liability less preliminary tax paid) plus your preliminary tax payable for 2019. So from the second year of assessment this “double liability” will not exist.

How is it calculated?

Preliminary Tax is calculated on either:

  • 100% of your previous year’s liability, or
  • 90% of your current year liability, or
  • 105% of your pre-preceding year’s liability. (This will not apply in the first years)

As estimating the current year’s liability can be both time-consuming and costly the majority of clients opt to pay 100% of the previous year’s liability.

From our example above, when we go to pay our preliminary tax for 2018, we will estimate the liability for 2018 as being 100% of your 2017 liability, so basically you have to pay twice your 2017 liability by 31/10/18.

What happens if I don’t pay Preliminary Tax?

If you fail to pay your Preliminary Tax, then you are liable to a series of penalties, interest and surcharges.  The interest alone is charged at a daily rate of 0.0219% and in addition to this, a surcharge of 5% to 10% may be applied.

Individual v’s Companies

Individuals

Individual self-assessment taxpayers, like the Directors of our umbrella companies, are required to file and pay their income tax and preliminary tax liabilities as follows:

Income tax year ended 31/12/17 – File and Pay tax liability for 2017 and preliminary tax for 2018 by 31/10/18

Companies (like our clients with a Personal Limited company)

The tax liability and preliminary taxes are due as follows.

Accounting Year End:  31st December 2017

Corporation Tax Deadline:  23rd September 2018 (9 months after accounting year-end)

Preliminary Tax Deadline:  23rd November 2018 (11 months after the accounting year-end)

Icon Accounting are more than happy to provide you with any further information in relation to this, just get in touch with us.

Gillian Reville FCCA, Financial Controller