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A brief history of Tax

Taxation remains an important aspect of national life, with direct taxes levied on income and profit and indirect taxes applied to services and goods, but how has taxation changed over time?

The amount of money collected from taxes was highly dependent on the scale of public spending. In the latter years of the 17th century the areas of expenditure that taxes were designated for consisted of only the army, the monarch and its palaces and a small government. In the 18th century the system of taxation was different to the structure of direct tax, such as income tax, that almost every working adult pays in the UK today. Only land or property owners had to pay direct tax and it was relative to the size of their landholdings, commonly between two and four shillings. It was known as the Land Tax, and effectively targeted the wealthiest class in society.

The first sign of British income tax as it is known today was introduced at the very end of the eighteenth century in 1799, by Prime Minister William Pitt the Younger. Temporarily introduced during the Napoleonic wars, a 10% tax was exercised on incomes above £200. Initially unpopular, the tax was slowly accepted as a condition of wartime in order to defeat Napoleonic France. There was a change in tone after France was defeated, and the income was abolished. In 1842 income tax was reintroduced by Sir Robert Peel, Conservative Prime Minister, but it only applied to incomes over £150. Trade was also revived through the reduction of custom duties on imported goods.

By the latter years of the 19th century, annual revenue was coming increasingly from direct taxation, but it was not enough to meet the rough cost of David Lloyd George’s proposals, who was Chancellor of the Exchequer at the beginning of the twentieth century. Lloyd George proposed assistance for periods of unemployment and provision for sickness, as well as pensions for the elderly. There was an emphasis on redistribution of wealth in his budget, with plans to implement a super-tax on the rich. A tax of sixpence to the pound was to be applied on any income over £5000, and it was payable on the amount which exceeded £3000. Death duties, which resemble inheritance tax today, were raised and tax was applied to the estate of the deceased, if the value was over the threshold.

As expected in 1914, with the outbreak of the First World War public support was directed at supporting the British war efforts and high levels of expenditure. 6 % was the rate of income tax in 1914 but by 1918 it was set to 30%, with Parliament easily capable of granting this due to the nature of wartime. It could be suggested that this rise was met with support, as the number paying income tax had risen to 3 million in 1920, from 1.13 million in 1914.

When Britain was plunged into the Second World War in 1939 public spending was again directed at advancing the capacity of the military. As a result income tax was increased to five shilling sixpence, which equated to 27.5%, in 1938. Individuals with income totaling over £50,000 were hit with a 41% surtax. A second raise to tax on income came during the war to try to meet rapidly expanding expenditure needs.

After the Second World War there was a transition to a more efficient Pay-As-You-Earn (PAYE) system as a result of the increased number of taxpayers during the war period. Employers began deducting tax from their employee’s wages and a P45 was given out to workers leaving their current employment. There were also the introduction of corporation and capital gains taxes, and purchase tax was replaced with value added tax (VAT) in 1973. VAT was introduced at a moment when the entry of Britain into the European Economic Community was highly anticipated, and other country members were implementing similar systems. The tax was much wider in its scope, being applied to a bigger variety of purchased items, as well as to all services and businesses. However, food, children’s clothing and books remained tax free.

Interestingly it wasn’t until 1992 that the Queen started paying tax on her income!

 

 

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