Preliminary Tax Explained | Money Made Clear

What is preliminary tax?

Revenue collects income tax in arrears — you file your return for 2025, for example, and pay the balance in October 2026. But Revenue also wants an advance payment toward the current year (2026) at the same time.

This advance payment is called preliminary tax. It is not a penalty or an extra charge — it is simply a deposit against a tax bill that has not been finalised yet. When you file next October, you pay the balance of what you actually owe after crediting the preliminary tax you already paid.

How to calculate preliminary tax

Revenue allows three methods. The first is by far the most commonly used:

Method	How it works	Best for
Method 1 (most common)	Pay 100% of your previous year's final tax liability	Most sole traders — simple and safe
Method 2	Pay 90% of your estimated current year liability	If you expect lower income this year — but risky if you underestimate
Method 3	Pay by direct debit in equal monthly instalments via ROS	Predictable cash flow, suits some businesses

Source: Revenue.ie — Preliminary tax ↗

If you use Method 2 and underestimate — paying less than 90% of the actual liability — Revenue can charge interest on the shortfall. Method 1 avoids this risk entirely.

The first-year double payment problem

This catches many new sole traders off guard. In your first year of trading, there is no previous year's liability — so you only pay preliminary tax for Year 1 at the October deadline.

But in Year 2, you pay both at the same time:

What you pay in October Year 2	Amount (example)
Balance of Year 1 tax liability	€4,000
Preliminary tax for Year 2	€4,000
Total due in one payment	€8,000

This is not a mistake or a penalty. It is simply how the system works. The good news is that once you get through Year 2, the system smooths out — each October you pay the balance of the previous year and preliminary tax for the current year, but they are roughly similar amounts.

Set aside 30–35% of every payment you receive throughout the year into a separate account. By October Year 2 you should have enough to cover both payments without a cash flow shock.

Common confusion

"Preliminary tax is extra tax on top of what I owe."

No. It is a deposit toward the current year's bill, not an additional charge. When you file next year's return, your preliminary tax is credited against your final liability. If you overpaid, you get a refund or credit. The total tax you pay over your lifetime as a sole trader is the same — preliminary tax just changes the timing.

"I don't need to pay preliminary tax in my first year."

You do not pay it in your first October (because there is no previous year). But you do pay preliminary tax for Year 1 at the end of Year 1. This is often the first payment — and then Year 2 is when the double payment happens. Plan for it from day one.

"I should pay as little preliminary tax as possible."

Only if you are confident your income this year will be lower than last year. If you use Method 2 (90% of current year estimate) and underestimate, Revenue charges interest. Most accountants recommend Method 1 (100% of previous year) for simplicity and safety.