Taxation, in all its forms, increased year by year from just under 19 per cent of private income in 1938–39 to nearly 32 per cent in 1944–45. For war purposes taxation revenue was stepped up by increases in income tax rates, by a new national security tax at a flat rate on income, and by increases in sales taxes.
Income tax on individuals, which took, on average, less than 1s. in the pound of their income before the war, was taking 1s. 6d. in the pound at the end of the war. The War Expenses Act 1939 increased all rates of income tax for the 1939–40 tax year by 15 per cent, and the same surcharge was made for the following two years.1 In 1942–43 the surcharge was increased to 33 1/3 per cent, and was to remain at that level until it was reduced to 15 per cent for the 1946–47 tax year.
In addition to the surcharges on income tax, a new tax on income, the national security tax, was imposed by the Finance Act 1940, specifically for war purposes, and came into operation from 21 July of that year. Like the social security charge, which had been introduced in April 1939, this was a flat rate on virtually all income, being fixed originally at a shilling on every £ of income. It was increased, by the Finance Act 1942, to 1s. 6d. on every £ of income. This latter rate was to remain in force until 1946.
In 1938–39 and earlier years there had been a charge on incomes of 8d. in the £ for employment promotion, but this had been superseded by the social security charge in 1939–40. Social security charge had been fixed at a shilling in the £ at the inception of the scheme in April 1939 and remained at that rate throughout the war. In May 1946 the social security charge would rise to 1s. 6d. in the £, but the national security tax would fall by 1s. to sixpence in the £.2
Changes in revenue from each type of taxation are shown in the table on p. 263, which also gives a useful summary of the special taxation levied for war purposes.
For individual taxpayers the position changed as follows:
1 To give some impression of the incidence of these tax increases the rates of tax (in brackets) fixed by the 1939 Budget for a man with a wife and two dependent children on various earned incomes were: £300 (Nil), £400 (£5), £1,000 (£83), £5,000 (£1,366), £8,000 (£3,203).
2 National security tax was abolished in April 1947.
|Rate of Tax per £ of Income|
|Income tax (average rate on all assessable income)||1s. 0d.||1s. 6d.1|
|Employment promotion tax||8d.||–|
|Social security charge||–||1s. 0d.|
|National security tax||–||1s. 6d.|
|1s. 8d.||4s. 0d.|
With these changes in direct taxes on income, the amount of direct tax per head of population increased steadily from £8 17s. 5d. in 1938–39 to reach over 4 ½ times this level, £41 2s. 3d., in 1944–45.
Provision for additional revenue for war purposes was also made by way of indirect taxation in September 1939, when the duty on motor spirits was raised from 10d. to 1s. 2d. a gallon, and the duty on tobacco, cigars and cigarettes was increased by 25 per cent. Beer duty rose, also, from 1s. 9d. a gallon to 2s. These and other changes were expected to bring in about £1 million a year in extra revenue. Sales tax, which stood at 5 per cent on a wide range of goods, was not raised until June 1940, when it was doubled, in order to bring in another £3 million a year.
Further alterations in indirect taxation were made in May 1942, when the rates on tobacco and alcoholic liquors were again substantially raised. At the same time, sales tax on most taxable goods was once more doubled, to reach 20 per cent of the sale value. Indirect taxes remained at these levels for the rest of the war.
Under these influences, customs and excise duties which had yielded £11·7 million in 1938–39 were yielding £14·9 million in 1944–45. Yields would have been considerably higher had it not been for the restraining effects of taxation and borrowing on consumption during the war period. The physical volume of private transactions fell, as it had to do if sufficient resources were to be made available for war purposes. Affected by declining imports and restricted private transactions, returns from customs and excise duties actually fell from 1939–40 to 1940–41, and again from 1940–41 to 1941–42. However, the 1942–43 yield was above the pre-war figure and there were steady increases for the rest of the war.
1 Approximate. The true figure may be a little higher than this. Incomes and income tax statistics were not compiled from 1942–43 to 1945–46 inclusive.
|Duty on instruments||0·4||0·4||0·4||0·3||0·4||0·5||0·4||0·5|
|Other stamps taxation||0·4||0·6||0·4||0·5||0·5||0·6||0·6||0·6|
|Total Consolidated Fund||32·3||32·8||34·9||35·2||36·2||42·0||45·7||48·4|
|SOCIAL SECURITY TAXATION|
|Social Security charge||5·02||8·9||10·1||10·4||11·6||12·8||13·7||14·6|
|Total Social Security Taxation||5·52||9·5||10·7||11·1||12·2||13·4||14·3||15·1|
|National Security taxation||–||–||6·3||10·5||16·8||19·2||20·5||21·7|
|Total War Taxation||–||2·2||15·7||21·9||39·6||45·4||48·7||51·4|
The most significant increases in tax yields were from direct taxation on incomes. As a proportion of all taxation, these direct taxes rose from 38 per cent in 1938–39 to a peak of 63 per cent in 1944–45. In this latter year direct taxes took £68 million out of private incomes totalling about £340 million, while other taxes took a further £40 million.
Chart 55 shows revenue received from taxation, classified according to the purpose for which the taxation was levied.