History of the United Kingdom Income Tax

The UK income tax was first instigated by William Pitt the Younger in Britain in his December 1798 budget as he needed to pay for tools, weapons and other gears to be used in the Napoleonic Wars. This new progressive income tax started at a rate of 0.83% in the Pound. This was levied on salaries higher than £60. It increased up to a maximum of 10% on salaries higher than £200. Pitt anticipated that this new income tax would put up £10,000,000 but for the year 1799, the total was just over £6,000,000.

Pitt’s income tax was imposed from the years 1799 to 1802 before it was eradicated by Henry Addington during the Peace of Amiens. In the year 1801, Addington took over as prime minister after Pitt resigned. Addington then reestablished the income tax in 1802 when conflict recommenced but a year after the Battle of Waterloo, it was once again eradicated. It was reestablished in the Income Tax Act of 1842 by Sir Robert Peel. Peel was a Conservative who was previously against the income tax in the general elections of 1841 but an increasing budget shortage necessitated a new source of resources and funds. The new income tax imposed then was enforced on salaries higher than £150, based on the model of Addington.

The UK income tax was imposed under five schedules. Any income not falling within those schedules were not subject to taxation. Schedule A was for income coming from any UK land, Schedule B was for industrial occupation of land, Schedule C was for income coming from public securities, Schedule S was for income coming from business and professions, casual income, trading income, overseas income and interest, and Schedule E was for employment income.

Some time after, Schedule F, a sixth schedule, was added. This was for UK dividend income.

Over the years, the UK income tax was revolutionized. Formerly, income tax was imposed on an individual’s income without considering who is/are beneficially entitled to that income. Today however, an individual only has to pay tax on income to which he or she is beneficially entitled. In 1965, majority of companies were exempted from income tax because of the introduction of corporation tax. The schedules were also modified.

In the year 2004, the Finance Act instigated an income tax scheme that has an objective of reducing the employment of common methods of inheritance tax avoidance. This was known as “pre-owned asset tax”.