Preliminary Tax Question

Flukey

I've been looking at the idea of self-assessment tax. One part that does not make sense is Preliminary Tax. My understanding is that it is a payment for part of your tax for the current year, which is fair enough. According to the Revenue website:

The minimum amount of preliminary tax which must be paid is the lower of:
90% of the tax liability for the actual year of assessment
or
100% of the tax liability for the preceding year of assessment
or
in the case of direct debit participants only, 105% of the tax liability for the pre-preceding year of assessment.

To avoid charges, interest etc., you'd have to do one of those. On the 90% rule though, it does not fully make sense. This has to be paid by October 31st. Obviously the current year has not been completed then. So at that point you will not know what you will have earned by the end of the year. Someone not on PAYE might have varying income throughout the year. So from this stage of the year to the end of the year they could earn a lot or a little. The point is, they don't know. So if they don't know how much they will earn by the end of the year how can they work out the final tax and then 90% of it?

They are in effect trying to work out 90% of an unknown figure. They could guess, but if they then got a large amount of income in the final quarter of the year, they could be well short. If they estimated that they would earn less this year and they pay less than the 90% they could be penalised. So they could be penalised for not paying a set percentage on an unknown figure, which does not make sense.

For example, say they paid €1000 total tax for 2005. Due to their earnings expected to be lower, they expect that they will have to pay less tax for 2006, so opt to pay preliminary tax of €900. As it turns out, due to a boost in earnings in the final quarter, 90% of this figure is €1200. In October they could not have known that of course. Come next year they are now €100 short of the lower of 2005's tax and 90% of 2006's tax and could be penalised.

So to be sure of avoiding any charges or interest in any year, the only option is to always pay 100% of last year's figures, which they will have. So the 90% rule does not seem to make sense, or what am I missing?

whatawaster

I always found the 90% issue slightly odd though. I guess you just have to give yourself a buffer, or just pay 100% of last years figure. you will get refunded any difference when you file your final return.

Flukey

Yes, it does seem a bit odd. Apparently they also get you to declare tax that has been deducted at source like DIRT, Dividend Witholding Tax and any PAYE tax you have paid. Then in doing their calculations they are included and then deducted out of your final liability. So they ask you to declare it and then they ignore it. Surely self-assessment should be purely confined to income that tax has not been paid on, like for someone self-employed or doing some work on contract outside the PAYE system. If you are on PAYE, you are only taxed on your earnings and while you may be paying DIRT or DWT, these are not relevant in calculating your income tax. Surely self-assessment should not include tax already deducted at source either, especially when they do go on and ignore it anyway. It seems over-complicated. Is it to discourage people or to give accountants more to do?

lennie19ieie

I know this has nothing to do with what was said before but I was just wondering what people think of this e-mail I got and has anyone tired it. Please God we're all owed money back.

All,

In light of recent news reports and subsequent adverts on bus stops/trains/billboards, it appears the Revenue Commis owe us a lot of money. If you need a more precise figure, try EUR1.2 billion, over the past five years.

In order to see if you are owed money, you'll need to contact the Revenue on 1890 333 425. There is a voice activated service when it answers and it asks for your PPS number. When you give this, it asks what service you want, simply say "None of these" and wait for an operator to continue. Ask him/her for a P21 Balancing Statement and get it back-dated to 2002 or as far back as possible. They will check if all your details are correct and send them out. If you are owed any money, you get a tasty cheque from them within days. On the other hand (and don't shoot me for this!!), if you owe them money, it will be taken from you in the form of a reduction in your tax credits in the years to come.

In case you need any more encouragement to do this, nearly everyone in my immediate area did this and so far three people have received back tasty cheques for EUR386, EUR837 & over EUR1,400 each. I'm still waiting on my reply. Now tell me you can't bother picking up the phone and calling them....

Also anyone renting can claim a tax credit for EUR330 which will lower the amount of tax you pay and this can also be back dated to as far back as you have been renting in current or previous tenancies. Go to www.revenue.ie, click on the 'Tax & Duty' link on the left hand column, move down to the 'Personal Credits' and click on 'Rent Tax Credit', print the form, fill it in and send to your local tax office (not the Dublin one). Anything refundable this year will be given back by your employer in your payslips. Refunds for last year, the year before, etc will be refunded by cheque.

Best of luck, and you're welcome...

Flukey

Are there no comments or light shed on the preliminary tax issue, from any of our resident experts in these matters?