income tax

income tax was introduced in 1799 by William Pitt's government to fund the war against the French. Proposing the legislation Pitt pointed to evasion of existing assessed taxes and claimed that the levies on income were equitable if not ‘perfectly free from the objection of inequality’. The final form of the income tax system was embodied in the Act of 1803, the creation of Addington, prime minister and chancellor of the Exchequer.

The need for a new tax arose from unprecedentedly high expenditure on the British armed forces and on subsidies to the allies. Simultaneously, interest payments on the national debt had increased because the government continued to finance some expenditure by raising further loans. Many supposed that income tax would be a temporary expedient of war and in fact Parliament repealed the tax in 1816 and ordered the commissioners for the affairs of taxes to destroy their records. Although this was done, duplicates remained with the king's remembrancer.

Raising revenues continued to present problems to chancellors of the Exchequer. Moves towards free trade had led to the abolition of many indirect taxes on goods and services, and in addition the introduction of the penny post in 1840 reduced revenues from the postal services. In 1842 Sir Robert Peel proposed that ‘for a time to be limited, the income of the country shall be called upon to contribute to remedying this growing evil [the deficit]’. No chancellor since 1842 has removed income tax.

The 1842 income tax followed closely the administrative mechanisms established in the Act of 1806. There were only two differences: the minimum income taxed was £150 instead of £50, and the assessment of taxes on incomes from commercial activity was subject to the scrutiny of special commissioners to prevent fraud and evasion. Incomes were taxed under five Schedules: A, income from land and buildings; B, farming profits; C, funds and annuities from public revenues; D, profits and interest; E, income from employments, annuities, and pensions. These schedules remain until the present time with the exception of A, which was abolished in 1963.

Although Disraeli proposed, in 1853, the abolition of income tax by 1860, the expense of the Crimean War encouraged Gladstone to keep it. Government expenditures on defence continued to rise and after 1906 the cost of defence and social welfare increased rapidly. David Lloyd George's ‘People's Budget’ of 1909 imposed, for the first time, income tax with rates varying according to the ability to pay. Thus income tax became more than a device for raising revenue and was a step towards redistribution of income. During the First World War alterations in the rates of tax on incomes offset some costs of warfare. The highest personal rate was known popularly as ‘supertax’ and the prosperity of firms involved in wartime activities incurred Excess Profits Duty. Higher personal taxes remained after the war ended, a Corporation Profits Tax replacing the Excess Profits Duty.

Although changes in the rates of income tax occurred between the two world wars, the Second World War required both more revenue and limits on demand inflation. This latter threat arose from higher wages seeking inadequate quantities of goods and services. The year 1941 saw the introduction of a new type of levy, reimbursable post-war credits, at the rate of 10s. (50p) in the pound, to enforce savings. Repayment was slow; many taxpayers waited as long as 20 years for their money. Simultaneously the surtax rate increased to 19s. 6d. in the pound.

Since 1945 reductions in the standard rate have occurred, although rates have always remained above those of peacetime in earlier periods.

Ian John Ernest Keil