Death and Taxes: Financing Britain’s Wars
In this intriguing exploration of British fiscal history, Simon Thomas, Managing Director of Ridgefield Consulting, reveals some of the surprising and intricate relationships between warfare and taxation in the United Kingdom. From medieval scutage to the modern PAYE system, this article reveals how moments of national crisis fundamentally shaped the tax structures we know today. Thomas takes us on a journey through centuries of innovation in public finance, showing how creative solutions to wartime funding challenges evolved into the cornerstone principles of modern taxation. Whether you're a history enthusiast, a tax professional, or simply someone who is curious about how our current system came about, this article offers valuable insights into how national emergencies have consistently driven financial innovation in Britain.
You may wonder what war and taxes have in common. Unbeknownst to many, the two have strong links throughout UK history. Wars, often expensive and prolonged, have frequently driven the Government and historically the Crown to seek new ways to generate revenue through the rise of existing taxes and the introduction of new taxes. Over the centuries, the burden of financing these conflicts has shaped the UK’s modern-day taxation system.
Early Taxation and War
The roots and early intertwining of taxation and war begin in medieval times. In tumultuous Norman England, Henry I often gifted land to his knights or nobles under the ‘feudal system’. In return he expected them to offer their military service, and this was central to supporting and building his military.
If these landholders did not want to offer their service in exchange for the land, they could pay a tax called ‘scutage’ and the King would use this money to hire professional soldiers in their place. This practice became a vital source of funding in war and the Crusades and was adopted further by Henry II.
The Window Tax and Creative Revenue Measures
Over the centuries, financial pressures from ongoing wars pushed the government to come up with creative, controversial, and sometimes unusual, forms of taxation. One famous example was the window tax, introduced in 1696 under William III. This tax was designed as an indirect method to tax wealthier households without imposing a formal income tax. Homeowners were taxed based on the number of windows in their homes, as larger homes with more windows were often owned by the wealthier classes. However, to avoid the tax, many property owners began bricking up their windows, giving rise to the term “daylight robbery.”
Other unique taxes have followed in history, like the hearth tax, which charged per fireplace, and the hair powder tax, imposed on those who wore powdered wigs—a symbol of wealth at the time. These inventive taxes highlight how the government’s need for revenue during times of crisis arose. Many of these policies, despite their unusual nature, set the foundation for modern progressive taxes.
The Napoleonic Wars: Income and Inheritance Tax
The Napoleonic wars (1799-1815) marked a turning point in taxation and, to finance its immense costs, Prime Minister William Pitt the Younger introduced income tax in 1799. This was the first taxation of its kind on personal earnings and, even though it was originally meant as a temporary measure, set the stage for modern taxation.
The birth of inheritance tax was brought in initially known as ‘legacy duty’ under George III's reign, a tax was imposed on property passed through wills to raise revenue for the government. Legacy tax was levied on how close the relationship of those who inherited was to the deceased. This tax later evolved in the late 1800s as the wars needed more revenue and saw the introduction of succession duty which would tax the whole of the inherited state like today's form of inheritance tax.
The World Wars and Expansion of the Tax System
War is expensive for all; however, the government realized that some industries were profiting from ongoing troubles, for instance, arms manufacturers. During the First World War (1914-1918), because of this, they introduced an excess profits tax on profits that were above their normal pre-war level. This tax was levied at 50% on the profits that surpassed the normal level, with a £200 deduction per year for each business.
The Second World War (1939-1945) saw an expansion of these wartime taxes, with significant increases in income tax and other goods and services, to help raise the money needed to support the war effort. In 1938 they decided to increase income tax, the standard rate was increased to (27.5%) 5 shillings and 6 pence.
Additionally, a surtax, like today's additional tax bracket, was introduced: incomes over £50,000 were subject to a 41% surtax on top of the standard rate, meaning income below £50,000 was taxed at 27.5%, and any income above this threshold faced the higher surtax rate.
To streamline tax collection, the PAYE (Pay As You Earn) system was introduced in 1944 and now some 10 million people are paying direct taxation. This system allowed employers to deduct income tax directly from employees’ wages on a weekly or monthly basis, making tax collection more efficient and forming the basis of the modern income tax system.
Recovering from World War II, the government faced the financial challenge of rebuilding the country, leading to further increases in taxes, particularly inheritance tax. Rates soared from below 60% to as high as 80% by 1969, which is a stark contrast to today's rate of 40%.
In summary, the history of taxes has always been intertwined with wars in the UK and shows how taxation has often been a balancing act between government goals and public needs. These taxes, originally meant to be temporary, have become a lasting part of today’s system, reminding us of how times of crisis can shape what society expects from taxation.
About the Author
Simon Thomas, Managing Director of Ridgefield Consulting. Simon has a longstanding background in tax and accounting, starting with his father, Brian Thomas, who is a Chartered Accountant. Simon trained in London, at one of the Big4 – EY, where he gained expert knowledge and experience. Simon started Ridgefield Consulting in 2010. In April 2021, he expanded the business by acquiring a sister practice Kench & Co.
Sources:
J.R.T. Hughes, Financing the British War Effort, Cambridge University Press, 2011
Steven A. Bank & Kirk J. Stark, War & Taxes, Journal of Scholarly Perspectives, 2008
