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History of Income Tax

The History of Income Tax

The first records of taxation in England go right back to the 7th Century, when there was a ruling by King Ethelbhert of Kent that all judicial fines should be paid to the crown.

500 years later, King John introduced an export tax on wool, then in 1275 King Edward I decided to put tax on wine, and in the 16th century a poor law tax was introduced to help those in need.  A very early form of welfare, if you like.

Actual Income Tax was very hard to establish as the rich felt that their financial matters should remain private, so in the early 18th century a highly controversial tax was introduced, known as window tax.  A simple way to explain this is the more windows you had in your house, the more tax you paid.  Under ten windows, you paid two shillings a month, more than ten, you paid four shillings a month. If you were wealthy enough to have twenty windows or above you’d be clobbered for eight shillings.

Nowadays there are all sorts of nefarious ways to dodge tax, such as off shore investments. It was a lot more straightforward back then, and people would simply brick up their windows. There is still evidence of this today in some of the country’s older house.

Income tax as we know it today was introduced by William Pitt the younger, to raise much needed money for the Napoleonic wars.  It was a complicated system that took into consideration property owned, followed by woodland, then profession, then finally, if none of those applied, income.  It only effected the wealthier families and was a flat rate which varied, depending on whether we were fighting a war or not.

Income Tax was formally repealed in 1816, a year after the Battle of Waterloo, but it was reintroduced in 1842 by Sir Robert Peel to deal with a massive public deficit, quickly reaching an all-time high of 63% during the Crimea conflict.

By the beginning of the 20th Century, there were less than one million tax payers.  It was still something only the rich would pay, reflected in Lloyd George’s 1909 budget where if you earned the equivalent of £200,000 per year, you’d be hammered for a massive 8%!

It was war again which made the government rethink income tax, and during WW1 tax rose to over 50%.  By the time WWII started, more and more people were dragged into taxation, and by the end of it over twelve million were now coughing up to the treasury.  It was during this period that PAYE was born, where tax was paid at source, rather than a collection every six months.  This was the time that tax codes were introduced which would inform the employer of what percentage he needed to deduct.

After the war tax slowly, but continuously rose, peaking in the 1970s, when the then Labour chancellor announced that he was going to “squeeze the rich until the pips squeak”, and tax for the wealthiest rose to 83%, then soon after, when an investment surcharge was added, 98%.  This led to an exodus of actors and musicians, such as David Bowie, The Rolling Stones and Sean Connery, who fled to places such as Switzerland and Monaco in order to protect their fortunes.  But this was well short of what was charged during the 1968 economic crisis where Roy Jenkins introduced a twelve-month tax levy on unearned income and income from investments to, and I hope you’re sitting down, 136%!

John Whiting, a partner in accountants Price Waterhouse Coopers, explained “It meant a person with investment income of more than £6,000 would pay tax of 20 shillings and nine pence – or £1.04 today – for every £1 of income, while someone with investment income above £15,000 would pay total taxes of 27 shillings and three pence or £1.36 on every £1.”

Unsurprisingly, the Conservatives won the next general election and tax was cut to 60% for the wealthy, and reduced the basic rate from 33% to 30%.  Though to subsidise this they nearly doubled the VAT rate, as it rose from 8% to 15%.

This move from the chancellor, Geoffrey Howe of cutting the top rate, actually increased tax revenue, as the wealthy people of Britain felt less inclined to cheat on their tax bills, or run off to countries with a fairer tax system

Margaret Thatcher came into power as the Conservative leader in 1979, and she had very different ideas when it came to tax, and argued that heavy rates of marginal taxation on high earners were a disincentive to entrepreneurship and hard work.  Taxes were reduced and the UK entered a boom period, or a ‘greed period’ as some say. London, in particular, was awash with money, though outside the capital it was a different story as Thatcher closed down the mining industry, and the North/South divide became increasingly disparate.

This was also the beginning of a housing boom, as Thatcher also believed that it was everyone’s right to own their own home.  Council housing was sold off for peanuts to medium to long term tenants, banks and building societies offered mortgages to just about anyone who wanted one.  It couldn’t last, of course.  The economy combusted, interest rates rocketed, Thatcher was ousted, and soon after Labour were back in power.

Though Labour didn’t raise Income Tax, they introduced a number of ‘stealth taxes’, such as taxation on pensions and savings.  They abolished the Married Couple’s Allowance for all except those in marriages and civil partnerships where one person was born before April 1935, in which case an allowance may still be claimed. VAT was also put up to 20%.

Personal tax allowances started to go up, which was a trend continued by David Cameron’s Conservative government, and continues today.  However, taxes on the rich have also been consistently lowered for the wealthy, which remains a contentious issue as the rich/poor divide continues to widen.

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