Income Tax was announced in 1798, and introduced in 1799, as a means of paying for the war against the French forces under Napoleon. France was threatening to invade, and had already landed briefly in Wales and Ireland. For much of his campaigns from 1795, Napoleon was better organised than the British forces. The cost of war had drained Britains resources, and run up a considerable national debt. The army was starving, and poor conditions in the navy in 1797 had led to mutiny.
William Pitt the Younger was Prime Minister and Chancellor of the Exchequer from 1783, and needed greater aid and contribution for the prosecution of the war.
Certain duties upon income as outlined in the Act of 1799 were to be the (temporary) solution. It was a tax to beat Napoleon. Income tax was to be applied in Great Britain (but not Ireland) at a rate of 10% on the total income of the taxpayer from all sources above £60, with reductions on income up to £200.
It was to be paid in six equal instalments from June 1799, with an expected return of £10 million in its first year. It actually realised less than £6 million, but the money was vital and a precedent had been set.
In 1802 Pitt resigned as Prime Minister over the question of the emancipation of Irish catholics, and was replaced by Henry Addington. A short-lived peace treaty with Napoleon allowed Addington to repeal income tax. However, renewed fighting led to Addingtons 1803 Act which set the pattern for income tax today.
Addingtons Act for a contribution of the profits arising from property, professions, trades and offices (the words income tax were deliberately avoided) introduced two significant changes:
- Taxation at source - the Bank of England deducting income tax when paying interest to holders of gilts, for example
- The division of income taxes into five Schedules - A (income from land and buildings), B (farming profits), C (public annuities), D (self-employment and other items not covered by A, B, C or E) and E (salaries, annuities and pensions).
Although Addingtons rate of tax was half that of Pitts, the changes ensured that revenue to the Exchequer rose by half and the number of taxpayers doubled. In 1806 the rate returned to the original 10%.
Pitt in opposition had argued against Addingtons innovations: he adopted them almost unchanged, however, on his return to office in 1805. Income tax changed little under various Chancellors, contributing to the war effort up to the Battle of Waterloo in 1815.
Nicholas Vansittart was Chancellor when Napoleon was defeated. His inclination was to maintain some tax on income, but public sentiment and the opposition were against him. A year after Waterloo, income tax was repealed with a thundering peal of applause and Parliament decided that all documents connected with it should be collected, cut into pieces and pulped.
The critics of income tax had won the day, but experience had proved that it was a practical means of raising revenue, that it could be applied fairly, and that concerns about invasion of privacy were largely misplaced. The critics were also frustrated in the destruction of the records, unaware that duplicates had already been sent to the Kings Remembrancer.