The self-assessed tax return deadline day is looming and with the economy improving some self-employed people throughout the country are now realising that 2015 was much better than 2014. This is great news but this financial upturn will have major implications for their tax bill – which might not be quite so welcome. Experts at Taxback.com say that those who are seeing their business on an upward trajectory will now not only have to pay the difference between what they predicted for 2015 in their preliminary tax payment in Oct 2015, which many people may have underestimated, and the reality of what their tax bill was for the year, but this higher amount could drive up the preliminary tax for 2016 – so effectively they’ll get a “double hit”.

Barry Flanagan, Senior Tax Manager at www.taxback.com explained, “It is entirely possible that a “double hit” will occur for many self-employed people this year as a result of improving economic conditions. This is a necessary evil of a growing business so while there might be a financial sting in the tax return this year – it’s all for a greater good because higher tax bill stems from higher profits.

For example, if a self-employed person had a tax bill of €25,000 in 2013 and 2014, they probably paid that amount in preliminary tax last October for 2015. But now that they’ve completed their accounts, they may find that the tax for 2015 is actually €40,000, so they will need to pay the addition €15,000 for 2015 at the end of this month, plus preliminary of €40,000 for 2016. So their actual payment has jumped from €25,000 to €55,000 in just 12 months”.

Taxback.com say that to avoid interest charges, the amount of preliminary tax paid for a tax year must be equal to or exceed the lower of:

1) 90% of your final liability for the current tax year (i.e. 2016),
2) 100% of your final liability for the previous tax year (i.e. 2015), or
3) 105% of your final liability for the pre-preceding tax year (i.e. 2014).

Barry continued, “Our standard advice in respect of Preliminary Tax is that the individual needs to ensure that they are comfortable with the option that they select.

For most people, this means taking the “risk averse” Option 2 of paying 100% of the previous year liability, which eliminates the potential for an underpayment and any associated penalties in the following year, regardless of how fallow or fruitful it is.

Option 1 – paying 90% of anticipated current year (i.e. 2016) liability – is the option most likely to lead to underpayment, and consequently is really only recommended when the individual is very confident they can accurately predict their final liability. It is most often used by those who through their own personal circumstances know they will have a reduced income and liability.

If the individual has experienced a “bumper” year and has not planned adequately for it, or has another financial outlay they wish to prioritise, they may wish to exercise the lesser known “Option 3”. This is the option to pay 105% of your final liability for the pre-preceding tax year (i.e. basing it on 105% of 2014 final liability). But we would stress that this option is only available where preliminary tax is paid by direct debit and does not apply where the tax payable for the pre-preceding year was nil. Anyone hoping to avail of this option would need the direct debit in place by the end of this month at the latest.

Regardless of the option chosen, the final liability will remain the same so really this is a cash flow consideration only. Where the cash flow impact is not material, our recommendation would be to ensure compliance by paying 100% of the previous year and taking the hit now, to ensure no nasty surprises later”.

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