Basic principles of income tax

Background

Income tax affects most individuals. It is collected through a number of methods, including Pay As You Earn (PAYE), self assessment and deduction at source. The main pieces of legislation are the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), the Income Tax (Trading and Other Income) Act 2005 and the Income Tax Act 2007 (ITA 2007). For further guidance on the legislation relevant to income tax (including the tax rewrite project), see Practice Note: What is the basis of income tax?

Income tax on the earnings of an employed individual is collected on a monthly or weekly basis, depending on how the individual is paid. The tax collection is administered by an individual’s employer through PAYE under which the employer has an obligation to pay the income tax owed by the individual directly to HM Revenue & Customs (HMRC).If the individual also has income from other sources which are received gross, such as rental income, or net of tax at a rate below the individual’s marginal rate of tax, they must account for the additional income tax through the self assessment

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