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:

MethodHow it worksWhen it is commonly used
Method 1 (most common)Pay 100% of your previous year's final tax liabilityMost sole traders — simple and safe
Method 2Pay 90% of your estimated current year liabilityIf you expect lower income this year — but risky if you underestimate
Method 3Pay by direct debit in equal monthly instalments via ROSPredictable 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 2Amount (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.

Some sole traders keep a percentage of each payment in a separate account during the year. The amount needed depends on income, expenses, credits, USC, PRSI and the final tax calculation.

What this means in real life

For a sole trader, preliminary tax means that an October payment can cover two different periods at once: the balance for the previous tax year and an advance amount for the current year. This is why the second year of self-assessment can involve a larger cash requirement even when the business has not suddenly become more profitable. The preliminary amount is credited against the final liability for that year when the return is later filed; it is not an extra lifetime tax. Revenue allows different calculation methods, but underpaying against the required test can lead to interest. The practical figures depend on actual profit, credits, earlier payments and the method used. The sole trader tax guide explains the wider income tax, USC and PRSI position.

Common confusion

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.
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.
This depends on the estimate used. If Method 2 (90% of current year estimate) is used and the estimate is too low, Revenue can charge interest. Revenue also lists a 100% of previous year liability method, which avoids estimating the current year.