Taxation in The United Kingdom - History

History

A uniform Land tax was introduced in England during the late 17th century. This formed the main source of government revenue throughout the rest of the 17th century, the 18th century and the early 19th century.

Income tax was announced in Britain by William Pitt the Younger in his budget of December 1798 and introduced in 1799, 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 (£5,077 as of 2012), and increased up to a maximum of 2 shillings (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.

Income tax was levied under five schedules. Income not falling within those schedules was not taxed. The schedules were:

• Schedule A (tax on income from United Kingdom 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)

Later a sixth Schedule, Schedule F (tax on United Kingdom dividend income) was added.

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 minister 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. The United Kingdom income tax was reintroduced by Sir Robert Peel in the Income Tax Act 1842. Peel, as a Conservative, had opposed income tax in the 1841 general election, but a growing budget deficit required a new source of funds. The new income tax, based on Addington's model, was imposed on incomes above £150 (£11,468 as of 2012),.

United Kingdom 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 tax 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. For corporation tax purposes, the Schedular system was repealed and superseded by the Corporation Tax Act 2009 and Corporation Tax Act 2010. The highest rate of income tax peaked in the Second World War at 99.25%.It was slightly reduced after the war and was around 90% through the 1950s and 60s.

In 1971 the top-rate of income tax on earned income was cut to 75%. A surcharge of 15% on investment income kept the top rate on that income at 90%.In 1974 this cut was partly reversed, and the top rate on earned income raised to 83%.With the investment income surcharge this raised the top rate on investment income to 98%, the highest permanent rate since the war. This applied to incomes over £20,000 (£155,247 as of 2012),. 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.The investment income surcharge was abolished in 1985.

Subsequent governments reduced the basic rate further, down to its present level of 20% in 2007.Since 1976 (when it stood at 35%) the basic rate has been reduced by 15 percentage points. However, this reduction has been largely offset by increases in national insurance contributions and value added tax.

In 2010 a new top rate of 50% was introduced on income over £150,000. In the 2012 budget this rate was cut to 45%.

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 1601. 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.