History of taxation in the United Kingdom
Encyclopedia
History of taxation in the United Kingdom includes the history of all collections by governments under law, in money or in kind, including collections by monarchs and lesser feudal lords, levied on persons or property subject to the government, with the primary purpose of raising revenue.
which among other measures, prohibited the use of taxes without the agreement of Parliament. This prevented the Crown from creating arbitrary taxes and imposing them upon subjects without consultation.
In 1692 Parliament introduced a national land tax
. This tax was levied on rental values and applied both to rural and to urban land. No provision was made for re-assessing the 1692 valuations and consequently they remained in force well into the 18th century.
came into being on May 1st, 1707, the window tax that had been introduced across England and Wales
under the Act of Making Good the Deficiency of the Clipped Money in 1696, continued. It had been designed to impose tax relative to the prosperity of the taxpayer, but without the controversy that then surrounded the idea of income tax
. At that time, many people opposed income tax on principle because they believed that the disclosure of personal income represented an unacceptable governmental intrusion into private matters, and a potential threat to personal liberty. In fact the first permanent British income tax was not introduced until 1842, and the issue remained intensely controversial well into the 20th century.
When the window tax was introduced, it consisted of two parts: a flat-rate house tax of 2 shillings per house (comparable to £ in ), and a variable tax for the number of windows above ten windows. Properties with between ten and twenty windows paid a total of four shillings (comparable to £ in ),, and those above twenty windows paid eight shillings(£ as of ).
by William Pitt the Younger
in his budget of December 1798 to pay for weapons and equipment in preparation for the Napoleonic Wars
. Pitt's new graduated (progressive) income tax
began at a levy of 2 old pence in the pound
(1/120) on incomes over £60 (£ as of ), and increased up to a maximum of 2 shilling
s (10%) on incomes of over £200. Pitt hoped that the new income tax would raise £10 million, but actual receipts for 1799 totalled just over £6 million.
in 1801, after Pitt's resignation over Catholic Emancipation
. The income tax was reintroduced by Addington in 1803 when hostilities recommenced, but it was again abolished in 1816, one year after the Battle of Waterloo
.
Addington's Act for a ‘contribution of the profits arising from property, professions, trades and offices’ (the words ‘income tax’ were deliberately avoided) introduced two significant changes. First, it allowed taxation at the source; for instance, the Bank of England would deduct an amount, to be paid as tax, from interest paid to gilt holders. Secondly, it introduced schedules:
Income not falling within those schedules was not taxed. (Later a sixth Schedule, Schedule F (tax on UK dividend income) was added.)
Although the maximum tax rate under Addington's Act was 5% -- only one-half of the 10% allowed under Pitt's -- the other changes resulted in a 50% increase in revenue, largely because it doubled the number of persons liable for the tax and somewhat expanded the scope.
Pitt in opposition had argued against Addington's innovations: he adopted them largely unchanged, however, when he returned to office in 1805. The one major change he made was to raise the maximum rate back to the 10%, the rate in his original bill, in 1806. Income tax changed little for the duration of the Napoleonic Wars
, despite changes in government.
Nicholas Vansittart was Chancellor in 1815, at the time of the Battle of Waterloo
. He was inclined to maintain the income tax, but public sentiment was heavily against it, and predictably, the opposition championed its abolition. It was thus repealed in 1816 ‘with a thundering peal of applause’. In fact, the tax was so unpopular that Parliament ordered the destruction of all documents connected with it. This was more show than substance, as the King's Remembrancer had made duplicates and retained them.
Peel's income tax was imposed for three years, with the possibility of a two year extension. A funding crisis in the railways and increasing national expenditure ensured that it was maintained. For Peel, the debate was academic. In 1846 he repealed the Corn Laws - which supported farmers by inflating the price of corn when cheaper imports were available - and lost the support of much of his party. The Whigs resumed power the same year to be joined by some notable 'Peelites'.
A Conservative, Disraeli opposed Peel's repeal of the Corn Laws which had inflated the price of imported grain to support home farmers. He was three times Chancellor of the Exchequer and twice Prime Minister.
Formerly a Conservative, Gladstone supported the repeal of the Corn Laws and moved to the opposition (Whigs, and from 1868 Liberals). He was four times Chancellor and four times Prime Minister - his final term starting at age 82.
Disraeli and Gladstone agreed about little, although both promised to repeal income tax at the 1874 General Election. Disraeli won - the tax stayed (and probably would have done under Gladstone too).
Gladstone spoke for nearly five hours introducing his 1853 Budget. He outlined plans for phasing out income tax over seven years (which the Crimean War was to upset), of extending the tax to Ireland, and introduced tax deductions for expenses 'wholly, exclusively and necessarily' incurred in the performance of an office - including keeping and maintaining a horse for work purposes. The 1853 Budget speech included a review of the history of the tax and its place in society, it is regarded as one of the most memorable ever made.
With the Whigs defeated in 1858, Disraeli returned as Chancellor and in his Budget speech described income tax as 'unjust, unequal and inquisitorial' and 'to continue for a limited time on the distinct understanding that it should ultimately be repealed'. But the Conservatives return to power was short-lived. From 1859 to 1866, the Whigs were back with Viscount Palmerston as Prime Minister and Gladstone as Chancellor.
Gladstone had set 1860 as the year for the repeal of income tax, and his Budget that year was eagerly awaited. Ill health caused it to be delayed and for his speech to be shortened to four hours. But he had to tell the House that he had no choice but to renew the tax. The hard fact was that it raised £10 million a year, and Government expenditure had increased by £14 million since 1853 to £70 million (these figures should be multiplied by 50 for a modern equivalent).
Gladstone was still determined that income tax should be ended. When a Select Committee was set up against his wishes to consider reforms which might preserve it, he packed the committee with supporters to ensure that no improvements could be made. In 1866, the Whigs' modest attempts at Parliamentary reform failed to win support in Parliament and the Conservatives returned to power, although with no overall majority. Disraeli succeeded where Gladstone had failed, seeing the Reform Bill of 1867 become law. This gave the vote to all householders and to those paying more than £10 in rent in towns - and so enfranchising many of the working class for the first time. Similar provisions for those living in the country came with Gladstone in 1884.
While Disraeli had gambled that an increased electorate would ensure a Conservative majority, and in 1868 he was Prime Minister, the election of that year saw the Liberals - as the Whigs had become - victorious under Gladstone. Income tax was maintained throughout his first Government, and there were some significant changes made including the right to appeal to the High Court if a taxpayer or the Inland Revenue thought the decision of the appeal Commissioners was wrong in law. But there was still a determination to end it. The Times, in its 1874 election coverage, said 'It is now evident that whoever is Chancellor when the Budget is produced, the income tax will be abolished'.
Disraeli won the election, Northcote was his Chancellor and the tax remained. At the time it was contributing about £6 million of the Government's £77 million revenue, while Customs and Excise contributed £47 million. It could have been ended, but at the rate at which it was applied (less than 1%) and with most of the population exempt, it was not a priority. With worsening trade conditions, including the decline of agriculture as a result of poor harvests and North American imports, the opportunity never arose again.
was introduced. These changes were consolidated by the Income and Corporation Taxes Act 1970
. Also the schedules under which tax is levied have changed. Schedule B was abolished in 1988, Schedule C in 1996 and Schedule E in 2003. For income tax purposes, the remaining schedules were superseded by the Income Tax (Trading and Other Income) Act 2005
, which also repealed Schedule F completely. The Schedular system and Schedules A and D still remain in force for corporation tax. The highest rate peaked in the Second World War at 99.25% and remained at about 95% till the late 1970s.
In 1974 the top-rate of income tax increased to its highest rate since the war, 83%. This applied to incomes over £20,000 (£ as of ),, and combined with a 15% surcharge on 'un-earned' income (investments and dividends) could add to a 98% marginal rate of personal income tax. In 1974, as many as 750,000 people were liable to pay the top-rate of income tax. Margaret Thatcher
, who favoured indirect taxation, reduced personal income tax rates during the 1980s. In the first budget after her election victory in 1979, the top rate was reduced from 83% to 60% and the basic rate from 33% to 30%. The basic rate was also cut for three successive budgets - to 29% in the 1986 budget, 27% in 1987 and to 25% in 1988. The top rate of income tax was cut to 40% in the 1988 budget.
. As such, business rates retain many previous features from, and follow some case law of, older forms of rating. The Finance Act 2004
introduced an income tax regime known as "pre-owned asset tax
" which aims to reduce the use of common methods of inheritance tax
avoidance.
Medieval times
In 1203, King John introduced an export tax on wool. In 1275, Kind Edward I introduced taxes on wine.Elizabethan times
In 1572, a Poor Law tax was established to help the deserving poor, and then changed from a local tax to a national tax in 1601.17th century
In June 1628, Parliament passed the Petition of RightPetition of right
In English law, a petition of right was a remedy available to subjects to recover property from the Crown.Before the Crown Proceedings Act 1947, the British Crown could not be sued in contract...
which among other measures, prohibited the use of taxes without the agreement of Parliament. This prevented the Crown from creating arbitrary taxes and imposing them upon subjects without consultation.
In 1692 Parliament introduced a national land tax
Land value tax
A land value tax is a levy on the unimproved value of land. It is an ad valorem tax on land that disregards the value of buildings, personal property and other improvements...
. This tax was levied on rental values and applied both to rural and to urban land. No provision was made for re-assessing the 1692 valuations and consequently they remained in force well into the 18th century.
Window Tax
When the united kingdom of Great BritainKingdom of Great Britain
The former Kingdom of Great Britain, sometimes described as the 'United Kingdom of Great Britain', That the Two Kingdoms of Scotland and England, shall upon the 1st May next ensuing the date hereof, and forever after, be United into One Kingdom by the Name of GREAT BRITAIN. was a sovereign...
came into being on May 1st, 1707, the window tax that had been introduced across England and Wales
England and Wales
England and Wales is a jurisdiction within the United Kingdom. It consists of England and Wales, two of the four countries of the United Kingdom...
under the Act of Making Good the Deficiency of the Clipped Money in 1696, continued. It had been designed to impose tax relative to the prosperity of the taxpayer, but without the controversy that then surrounded the idea of income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
. At that time, many people opposed income tax on principle because they believed that the disclosure of personal income represented an unacceptable governmental intrusion into private matters, and a potential threat to personal liberty. In fact the first permanent British income tax was not introduced until 1842, and the issue remained intensely controversial well into the 20th century.
When the window tax was introduced, it consisted of two parts: a flat-rate house tax of 2 shillings per house (comparable to £ in ), and a variable tax for the number of windows above ten windows. Properties with between ten and twenty windows paid a total of four shillings (comparable to £ in ),, and those above twenty windows paid eight shillings(£ as of ).
Income Tax
Income tax was first implemented in Great BritainKingdom of Great Britain
The former Kingdom of Great Britain, sometimes described as the 'United Kingdom of Great Britain', That the Two Kingdoms of Scotland and England, shall upon the 1st May next ensuing the date hereof, and forever after, be United into One Kingdom by the Name of GREAT BRITAIN. was a sovereign...
by William Pitt the Younger
William Pitt the Younger
William Pitt the Younger was a British politician of the late 18th and early 19th centuries. He became the youngest Prime Minister in 1783 at the age of 24 . He left office in 1801, but was Prime Minister again from 1804 until his death in 1806...
in his budget of December 1798 to pay for weapons and equipment in preparation for the Napoleonic Wars
Napoleonic Wars
The Napoleonic Wars were a series of wars declared against Napoleon's French Empire by opposing coalitions that ran from 1803 to 1815. As a continuation of the wars sparked by the French Revolution of 1789, they revolutionised European armies and played out on an unprecedented scale, mainly due to...
. Pitt's new graduated (progressive) income tax
Progressive tax
A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...
began at a levy of 2 old pence in the pound
Pound sterling
The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...
(1/120) on incomes over £60 (£ as of ), and increased up to a maximum of 2 shilling
Shilling
The shilling is a unit of currency used in some current and former British Commonwealth countries. The word shilling comes from scilling, an accounting term that dates back to Anglo-Saxon times where it was deemed to be the value of a cow in Kent or a sheep elsewhere. The word is thought to derive...
s (10%) on incomes of over £200. Pitt hoped that the new income tax would raise £10 million, but actual receipts for 1799 totalled just over £6 million.
19th century
Pitt's income tax was levied from 1799 to 1802, when it was abolished by Henry Addington during the Peace of Amiens. Addington had taken over as prime ministerPrime minister
A prime minister is the most senior minister of cabinet in the executive branch of government in a parliamentary system. In many systems, the prime minister selects and may dismiss other members of the cabinet, and allocates posts to members within the government. In most systems, the prime...
in 1801, after Pitt's resignation over Catholic Emancipation
Catholic Emancipation
Catholic emancipation or Catholic relief was a process in Great Britain and Ireland in the late 18th century and early 19th century which involved reducing and removing many of the restrictions on Roman Catholics which had been introduced by the Act of Uniformity, the Test Acts and the penal laws...
. The income tax was reintroduced by Addington in 1803 when hostilities recommenced, but it was again abolished in 1816, one year after the Battle of Waterloo
Battle of Waterloo
The Battle of Waterloo was fought on Sunday 18 June 1815 near Waterloo in present-day Belgium, then part of the United Kingdom of the Netherlands...
.
Addington's Act for a ‘contribution of the profits arising from property, professions, trades and offices’ (the words ‘income tax’ were deliberately avoided) introduced two significant changes. First, it allowed taxation at the source; for instance, the Bank of England would deduct an amount, to be paid as tax, from interest paid to gilt holders. Secondly, it introduced schedules:
- Schedule A (tax on income from UK land)
- Schedule B (tax on commercial occupation of land)
- Schedule C (tax on income from public securities)
- Schedule D (tax on trading income, income from professions and vocations, interest, overseas income and casual income)
- Schedule E (tax on employment income)
Income not falling within those schedules was not taxed. (Later a sixth Schedule, Schedule F (tax on UK dividend income) was added.)
Although the maximum tax rate under Addington's Act was 5% -- only one-half of the 10% allowed under Pitt's -- the other changes resulted in a 50% increase in revenue, largely because it doubled the number of persons liable for the tax and somewhat expanded the scope.
Pitt in opposition had argued against Addington's innovations: he adopted them largely unchanged, however, when he returned to office in 1805. The one major change he made was to raise the maximum rate back to the 10%, the rate in his original bill, in 1806. Income tax changed little for the duration of the Napoleonic Wars
Napoleonic Wars
The Napoleonic Wars were a series of wars declared against Napoleon's French Empire by opposing coalitions that ran from 1803 to 1815. As a continuation of the wars sparked by the French Revolution of 1789, they revolutionised European armies and played out on an unprecedented scale, mainly due to...
, despite changes in government.
Nicholas Vansittart was Chancellor in 1815, at the time of the Battle of Waterloo
Battle of Waterloo
The Battle of Waterloo was fought on Sunday 18 June 1815 near Waterloo in present-day Belgium, then part of the United Kingdom of the Netherlands...
. He was inclined to maintain the income tax, but public sentiment was heavily against it, and predictably, the opposition championed its abolition. It was thus repealed in 1816 ‘with a thundering peal of applause’. In fact, the tax was so unpopular that Parliament ordered the destruction of all documents connected with it. This was more show than substance, as the King's Remembrancer had made duplicates and retained them.
Under Peel
The general election of 1841 was won by the Conservatives with Sir Robert Peel as Prime Minister. Although he had opposed the unpopular income tax during the campaign, an empty Exchequer and a growing deficit gave rise to the surprise return of the tax in his 1842 Budget. Peel sought only to tax those with incomes above £150 (£ as of ), and he reduced customs duties on 750 articles out of a total number taxed of 1,200. The less wealthy benefited, and trade revived as a consequence.Peel's income tax was imposed for three years, with the possibility of a two year extension. A funding crisis in the railways and increasing national expenditure ensured that it was maintained. For Peel, the debate was academic. In 1846 he repealed the Corn Laws - which supported farmers by inflating the price of corn when cheaper imports were available - and lost the support of much of his party. The Whigs resumed power the same year to be joined by some notable 'Peelites'.
Gladstone and Disraeli
The second half of the 19th century was dominated by two politicians - Benjamin Disraeli and William Ewart Gladstone.A Conservative, Disraeli opposed Peel's repeal of the Corn Laws which had inflated the price of imported grain to support home farmers. He was three times Chancellor of the Exchequer and twice Prime Minister.
Formerly a Conservative, Gladstone supported the repeal of the Corn Laws and moved to the opposition (Whigs, and from 1868 Liberals). He was four times Chancellor and four times Prime Minister - his final term starting at age 82.
Disraeli and Gladstone agreed about little, although both promised to repeal income tax at the 1874 General Election. Disraeli won - the tax stayed (and probably would have done under Gladstone too).
Gladstone spoke for nearly five hours introducing his 1853 Budget. He outlined plans for phasing out income tax over seven years (which the Crimean War was to upset), of extending the tax to Ireland, and introduced tax deductions for expenses 'wholly, exclusively and necessarily' incurred in the performance of an office - including keeping and maintaining a horse for work purposes. The 1853 Budget speech included a review of the history of the tax and its place in society, it is regarded as one of the most memorable ever made.
With the Whigs defeated in 1858, Disraeli returned as Chancellor and in his Budget speech described income tax as 'unjust, unequal and inquisitorial' and 'to continue for a limited time on the distinct understanding that it should ultimately be repealed'. But the Conservatives return to power was short-lived. From 1859 to 1866, the Whigs were back with Viscount Palmerston as Prime Minister and Gladstone as Chancellor.
Gladstone had set 1860 as the year for the repeal of income tax, and his Budget that year was eagerly awaited. Ill health caused it to be delayed and for his speech to be shortened to four hours. But he had to tell the House that he had no choice but to renew the tax. The hard fact was that it raised £10 million a year, and Government expenditure had increased by £14 million since 1853 to £70 million (these figures should be multiplied by 50 for a modern equivalent).
Gladstone was still determined that income tax should be ended. When a Select Committee was set up against his wishes to consider reforms which might preserve it, he packed the committee with supporters to ensure that no improvements could be made. In 1866, the Whigs' modest attempts at Parliamentary reform failed to win support in Parliament and the Conservatives returned to power, although with no overall majority. Disraeli succeeded where Gladstone had failed, seeing the Reform Bill of 1867 become law. This gave the vote to all householders and to those paying more than £10 in rent in towns - and so enfranchising many of the working class for the first time. Similar provisions for those living in the country came with Gladstone in 1884.
While Disraeli had gambled that an increased electorate would ensure a Conservative majority, and in 1868 he was Prime Minister, the election of that year saw the Liberals - as the Whigs had become - victorious under Gladstone. Income tax was maintained throughout his first Government, and there were some significant changes made including the right to appeal to the High Court if a taxpayer or the Inland Revenue thought the decision of the appeal Commissioners was wrong in law. But there was still a determination to end it. The Times, in its 1874 election coverage, said 'It is now evident that whoever is Chancellor when the Budget is produced, the income tax will be abolished'.
Disraeli won the election, Northcote was his Chancellor and the tax remained. At the time it was contributing about £6 million of the Government's £77 million revenue, while Customs and Excise contributed £47 million. It could have been ended, but at the rate at which it was applied (less than 1%) and with most of the population exempt, it was not a priority. With worsening trade conditions, including the decline of agriculture as a result of poor harvests and North American imports, the opportunity never arose again.
From the Second World War
UK income tax has changed over the years. Originally it taxed a person's income regardless of who was beneficially entitled to that income, but now a person owes tax only on income to which he or she is beneficially entitled. Most companies were taken out of the income tax net in 1965 when corporation taxUnited Kingdom corporation tax
Corporation tax is a tax levied in the United Kingdom on the profits made by companies and on the profits of permanent establishments of non-UK resident companies and associations that trade in the EU. Prior to the tax's enactment on 1 April 1965, companies and individuals paid the same income tax,...
was introduced. These changes were consolidated by the Income and Corporation Taxes Act 1970
Income and Corporation Taxes Act 1970
The Income and Corporation Taxes Act 1970 was an Act of Parliament passed by the Parliament of the United Kingdom which was repealed in 1992.-Section 226 plans:...
. Also the schedules under which tax is levied have changed. Schedule B was abolished in 1988, Schedule C in 1996 and Schedule E in 2003. For income tax purposes, the remaining schedules were superseded by the Income Tax (Trading and Other Income) Act 2005
Income Tax (Trading and Other Income) Act 2005
The Income Tax Act 2005 is an Act of the Parliament of the United Kingdom.It restated certain legislation relating to income tax, with minor changes that were mainly intended "to clarify existing provisions, make them consistent or bring the law into line with well established practice." The Bill...
, which also repealed Schedule F completely. The Schedular system and Schedules A and D still remain in force for corporation tax. The highest rate peaked in the Second World War at 99.25% and remained at about 95% till the late 1970s.
In 1974 the top-rate of income tax increased to its highest rate since the war, 83%. This applied to incomes over £20,000 (£ as of ),, and combined with a 15% surcharge on 'un-earned' income (investments and dividends) could add to a 98% marginal rate of personal income tax. In 1974, as many as 750,000 people were liable to pay the top-rate of income tax. Margaret Thatcher
Margaret Thatcher
Margaret Hilda Thatcher, Baroness Thatcher, was Prime Minister of the United Kingdom from 1979 to 1990...
, who favoured indirect taxation, reduced personal income tax rates during the 1980s. In the first budget after her election victory in 1979, the top rate was reduced from 83% to 60% and the basic rate from 33% to 30%. The basic rate was also cut for three successive budgets - to 29% in the 1986 budget, 27% in 1987 and to 25% in 1988. The top rate of income tax was cut to 40% in the 1988 budget.
Business Rates
Business rates were introduced in England and Wales in 1990, and are a modernised version of a system of rating that dates back to the Elizabethan Poor Law of 1601Elizabethan Poor Law (1601)
The Act for the Relief of the Poor 1601, popularly known as the "Elizabethan Poor Law", "43rd Elizabeth" or the "Old Poor Law" was an Act of Parliament passed in 1601 which created a national poor law system for England and Wales....
. As such, business rates retain many previous features from, and follow some case law of, older forms of rating. The Finance Act 2004
Finance Act 2004
The Finance Act 2004 is an Act of the Parliament of the United Kingdom. It prescribes changes to Excise Duties, Value Added Tax, Income Tax, Corporation Tax, and Capital Gains Tax...
introduced an income tax regime known as "pre-owned asset tax
Pre-owned asset tax
In the United Kingdom, Her Majesty's Revenue and Customs acted against certain IHT schemes by imposing a standalone income tax charge from 6 April 2005. This has become known as pre-owned assets tax . POAT applies where an individual disposes of an asset but somehow retains the ability to use or...
" which aims to reduce the use of common methods of inheritance tax
Inheritance tax
An inheritance tax or estate tax is a levy paid by a person who inherits money or property or a tax on the estate of a person who has died...
avoidance.
External links
- Guide to personal taxation, from UK government site Directgov (Doesn't link to correct file, website redirects to index)
- Yahoo tax, UK tax portal
- TaxationWeb, UK tax portal
- Non Domicile Tax, understanding the UK policy on non-dom tax
- Tax Office UK, Business Tax, Property Tax, UK Taxes
- Taxation, weekly news information for UK tax practitioners
- VAT Calculator
- Taxation of Charities online
- Taxation of Foreign Domiciliaries online
- UK VAT calculator