War and the coming of income tax

William Pitt the Younger was a reforming prime minister who was determined to do what he could to rationalise the British system of taxation.

He was a keen devotee of the great economic thinker of the time, Adam Smith, and after becoming Prime Minister in 1783 Pitt put much energy into persuading Parliament to accept Smith's principles.

Accordingly, new taxes were introduced which fell principally on the well-off. These included new 'assessed taxes' on male and female servants, on horses, on carriages and on houses.

Although such measures were potentially unpopular with the taxpaying public, Pitt was able to secure their support by taking serious steps to root out revenue fraud and reduce administrative cost. His financial reforms helped to increase annual government revenue from £12.7 million in 1783 to £18.6 million in 1792.

Income Tax

These achievements were dealt a severe setback, however, in 1793 when Britain found itself at war with revolutionary France. Enormous extra expenditure on the army and navy required unprecedented borrowing and increased taxation.

Increases to indirect taxes and a new 'inheritance tax' were hardly enough, and in 1799 Pitt introduced a tax on incomes. Under this new tax all annual incomes over £200 were taxed at 10 per cent, while those between £60 and £200 were taxed at a graduated rate from just under one per cent to 10 per cent. No one was taxed on incomes below £60.

At first the tax was highly unpopular and was widely evaded, particularly among merchants and manufacturers. It was thought to be too intrusive into people's private financial circumstances.

In time, though, the tax came to be accepted as a vital price for winning the war against Napoleon. Indeed, many regarded paying the tax as a patriotic duty.

Biography

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William Pitt

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Did you know?

Works of art were specifically excluded from Pitt's inheritance tax, introduced in the Legacy Duty Act of 1796, and remained exempt from taxation until the Budget of 1894.