The long life of a temporary tax

One of the biggest political battles within the Coalition surrounds the fate of the 50p tax rate. Those on the right question its effectiveness, with the Institute for Fiscal Studies suggesting it costs more in lost taxes than it yields in additional revenue. Others have suggested it is an essential plank in restoring fiscal stability, and a manifestation of Cameron’s statement that ‘we are all in this together’.

There had been plenty of taxes before income tax – estate duties, ship money, window tax, wool tax, brick tax, wallpaper tax and the gloriously named ‘hair powder taxes’. Duties have been levied on beards, newspapers, paper, tea, ribbons, perfumes and horses.

Income tax itself, however, is barely 200 years old, was first announced in 1798 and introduced in 1799. It was part of a series of desperate measures taken by the UK Parliament to finance the ruinously expensive wars against Napoleonic France.

The time was ripe for fiscal intervention – Britain’s cash starved navy had been brought to the brink of mutiny in 1797, and the UK’s national debt was increasing in the face of a better organised and militarily successful France. Holding office as both the Prime Minister and Chancellor of the Exchequer, William Pitt the Younger convinced himself of the need for a dramatic new tax.

The tax was introduced at the rate of 10% on all incomes above £60 per annum to be paid in six equal instalments. Most importantly, it was designed as a temporary tax – only to be levied for the duration of the wars against Napoleon. It was expected to yield £10m, and, whilst actual receipts of £6m were disappointing, it did establish Income Tax as a useful source ofincreasing the coffers.

In 1802 Pitt resigned as Prime Minister and was replaced by Henry Addington. A short-lived peace treaty with Napoleon allowed Addington to repeal income tax. However, renewed fighting led to Addington’s Income Tax Act 1803 which set the pattern for income tax today.

A year after Waterloo, income tax was repealed ‘with a thundering peal of applause’ and, such was the public animosity against the tax, Parliament decided that all documents connected with it should be collected, cut into pieces and pulped. It appeared that no record of the hated tax would remain. Fortunately for supporters of the tax and historians, a complete copy of the papers had been sent to the King’s Remembrancer.

The tax would lay in abeyance for 26 years, until brought back as a surprise feature to Sir Robert Peel’s 1842 budget. As a Conservative, Peel opposed income taxes in principal, but was faced with deepening deficits and little alternative. Only those with incomes above £150 per annum were affected

Special income tax regimes were introduced to pay for both the First and Second World Wars. At the start of the First World War the standard rate of income tax was 6%, which produced an income to the Exchequer of £44 million with a further £3 million in super-tax. By 1918, the standard rate had risen to 30%, realising £257 million with £36 million more insurer-tax. This did little to dampen the spectacular growth of the national debt. In 1914 this stood at £706m and by 1920 it had risen to an unsustainable£7,875m.

Lessons were learnt when Britain geared up for another world-wide conflict. On the eve of the outbreak of the Second World War, the standard rate of income tax was 29% with surtax at 41% for incomes over£50,000. Ten million people were liable for tax, and the total sum raised was £400 million.

Successive increases in income tax rates and the steady lowering of allowances ensured that by 1945 these figures were a 50% rate of income tax, surtax at 48% for incomes over £20,000, fourteen million taxpayers and nearly £1,400 million raised.

Discussions on the impact of the 50p tax rate have to be put into perspective when set against the special rates introduced in 1947-8 and 1967-8:

  • For 1947-48 a special contribution was payable when a person’s total income exceeded £2,000. For investment income over £5,000 it was 50%. So with income tax at 45% and surtax at 52.5%, the effective rate was 147.5%.
  • In 1967-68, the special charge was imposed. For investment income over £8,000, the rate was 45% which – with income tax at41.25% and surtax at 50% – meant a total rate of 136.25%. Even without the surtaxes, the highest rates of income tax were enough to make the pips squeak.

In 1973, the top rate of income tax was 75%, a rate that was increased to 83% in 1974. This eventually reduced over the course of the Thatcher government – falling to 60% in 1979 and then 40% in 1988.