Page 4: Collecting income taxes and administering benefits
One of the most important principles of taxation is that of convenience. Taxes must be collected in a convenient form and at a convenient time. Income tax is a tax that is paid on income. It is paid by:
b) people who are self employed (partners and sole traders)
c) individuals who may not be working but have an income.
Paying income tax
When people are employed they are liable for income tax and pay this tax under the pay-as-you-earn (PAYE) system. Under this system, income tax is collected from an individual's pay and is then passed on to HMRC by the employer. The employer deals with the payments as well as all the paperwork.
Somebody who is a sole trader or partner and self-employed is responsible for running and managing their own business. He or she deals with their own tax affairs and is required to contact HMRC to tell them that they are self-employed. The law requires all people who become self-employed to register for tax within three months of starting their business.
Sole traders and partners are responsible for paying their own income tax and National Insurance contributions. If their business has a turnover of more than £61,000 per year, they will also have to register for VAT. If they employ other people they pay their income tax and keep full accounting records. The process of completing tax payments is simple and is detailed below:
a) The trader notifies HMRC they are in business
b) HMRC sends a Self Assessment tax form
c) details of income and expenses are completed
d) any tax allowances are claimed
e) the form is returned to HMRC
f) relevant tax due is paid to HMRC.