A Short History of Income Tax in Britain 🥱

Income tax might not sound like the most thrilling subject in the world. It has strong “letter from HMRC you would rather ignore” energy. But for law students, it is actually a useful way into much bigger questions: what is the state allowed to take, how does Parliament raise money, how do emergencies reshape legal systems, and how do “temporary” powers become permanent parts of everyday life?

Tax is not just an issue for accountants and economists; it is law, politics and constitutional power in practical form. Every income tax rule depends on legislation. Every threshold, allowance, rate and exemption reflects a choice about who should fund the state, how visible that burden should be, and how far government can reach into private income.

The history of income tax also helps us understand one of the big arguments in modern politics: should we tax work less and wealth more? Commentators such as Gary Stevenson have popularised the claim that Britain taxes earned income too heavily while allowing accumulated wealth to escape too lightly. Whether that is right, and whether reform is possible or desirable, cannot be answered properly without understanding how we got here. Why did the system shift so heavily towards taxing income in the first place? Was it because income was easier to see, easier to collect, or politically easier to justify? Could the system be changed back, or would taxing wealth create new legal, practical and economic problems? We cannot ask those questions seriously unless we understand how income tax evolved over time, and why.

The history of income tax also shows how law develops under pressure. While it feels like a permanent fact of British life, it is not. For most of British history, the state relied far more heavily on customs, excise duties and taxes on consumption. Britain’s income tax began as a wartime measure against Napoleon, disappeared, returned, expanded during the world wars, and eventually became one of the main pillars of the modern state. National Insurance then grew alongside it, formally as a contribution system, but increasingly operating like a second tax on earnings.

So, although income tax may look boring at first glance, its history is really the history of how Britain built the modern fiscal state: who the law chooses to tax, what it chooses to protect, and how far justice requires citizens to fund the society they live in.

Key terms

Income tax is a direct tax on personal income. In the UK, it applies to earnings, pensions, rental income, savings income and some investment income, though the exact treatment varies by category.

National Insurance contributions, or NICs, are also direct taxes on earnings. Formally, they are linked to entitlement to some benefits, especially the state pension. In practice, the Institute for Fiscal Studies says that the link between contributions paid and benefits received is “vanishingly weak” and that NICs “essentially act as a second income tax”.[1] NICs are not identical to income tax, because they are not charged on savings, pensions or property income, but for most employees they operate as another deduction from earnings.

GDP, or gross domestic product, is the value of goods and services produced in an economy over a period. Tax as a percentage of GDP is useful because £1 billion means something very different in 1914, 1979 and 2026.

Government receipts means the money coming into government, mainly from taxes and social contributions, but also from some non-tax sources. In this article, when I refer to the percentage of the “government budget” funded by income tax and NI, I mean the share of government receipts.

Marginal tax rate means the tax paid on the next pound earned. It is different from an average tax rate, which is the total tax paid as a percentage of total income.

Fiscal drag happens when tax thresholds and allowances fail to rise in line with wages or prices. Without any headline tax rate changing, more people start paying tax, or move into higher tax bands. The House of Commons Library identifies recent strength in income tax receipts as partly caused by more income being dragged into higher rates of tax.[2]

Global context: Britain was early, but not uniquely high-tax

Britain was one of the earliest major states to use a modern income tax. William Pitt introduced Britain’s first income tax in 1799 to help fund the war with France.[3] France did not introduce a progressive tax on income until 1914.[4] Prussia adopted a modern income tax in 1891.[5] In the United States, Congress only gained clear constitutional authority to levy a federal income tax with the Sixteenth Amendment, ratified in 1913.[6]

This makes Britain early in the history of income tax, but not always unusually high-tax overall. In the nineteenth century, the British state was small by modern standards. Today, the UK sits around the middle of developed economies for tax revenue as a share of GDP. The House of Commons Library notes that the UK raises less than most western European economies, largely because UK social security contributions, meaning NICs, are lower than equivalent contributions in countries such as France, Germany and Austria.[7]

Data note: why the early figures are approximate

The figures in this article are not all perfectly comparable. The cleanest modern data come from the House of Commons Library, the Office for Budget Responsibility and the Institute for Fiscal Studies. Comparable public sector receipts data are available from 1999/00, and the Commons Library gives income tax and NICs as percentages of GDP for 1999/00, 2019/20 and 2025/26.[8]

Before the modern National Accounts period, the data are less clean. For 1799 to 1816 and 1842 to 1914, there was no modern National Insurance system. For 1914 to 1918, the best comparable figure is “direct taxation”, mostly income tax and super-tax, not income tax plus NI. For 1949, the IFS gives a broad category of “income and wealth taxes” plus NICs, but that is broader than income tax alone because it includes other income and wealth taxes.[9]

For that reason, the early figures should be read as historically grounded benchmarks, not as a seamless annual statistical series.

At a glance: income tax and NI over time

1799 to 1816: income tax begins as a war tax

Britain’s first income tax was introduced in 1799 by William Pitt the Younger to help pay for the war with France. It was progressive, but much lower than modern rates. Annual incomes below £60 were exempt. Incomes between £60 and £200 were taxed at graduated rates from just under 1% to 10%. Annual incomes over £200 were taxed at 10%.[10]

The important point is that income tax began as an emergency measure. It was not seen as a normal peacetime tax. The OBR says that Pitt’s income tax had a “modest” fiscal impact, raising about 1% of GDP, and it was abolished in 1816 after the war ended.[11]

At this stage, income tax was not the centre of British taxation. The wider state was still funded heavily by customs, excise duties and other taxes on goods.

1842 to 1914: Peel’s “temporary” income tax becomes permanent

Income tax returned in 1842 under Sir Robert Peel. Peel used it partly to make possible a wider shift away from import duties and towards freer trade. The OBR notes that customs and excise duties constituted 70% of total receipts in 1820/21, but had fallen to below 50% by the end of the nineteenth century. It also states that Peel removed duties on more than 700 goods and reintroduced income tax to compensate for lost trade revenue.[12]

This was still not a mass tax on ordinary wages. There was no modern NI system, and government was much smaller than today. The OBR says the nineteenth century saw the overall burden of taxation fall from 12% to 7% of GDP.[13]

For this period, it would be misleading to give a precise modern-style “income tax plus NI as a percentage of GDP” figure. The safer conclusion is that income tax was becoming more important, but it remained a minority part of a much smaller tax system.

1914 to 1918: the First World War turns income tax into a major instrument

The First World War transformed British taxation. Before the war, government spending and receipts were each around 13% of GDP. During the war, tax revenue rose from 13% to 20% of GDP, and the number of people paying income tax tripled.[14]

The standard rate of income tax rose from 6% in 1914 to 30% in 1918. The number of income taxpayers rose from 1.13 million in 1914 to 3 million by 1920. By then, around 60% of tax revenue came from direct taxation, most of it from income tax and super-tax.[15]

This was the first great shift in the character of British taxation. Income tax stopped being merely a narrow elite tax and became a major source of national revenue. There was still no modern NI system, so the relevant category is direct taxation, not income tax plus NI. If tax revenue was about 20% of GDP and about 60% came from direct taxation, direct taxation was roughly 12% of GDP by the end of the war. That is a useful benchmark, but it is not a precise modern income tax plus NI figure.

1939 to 1948: the Second World War creates the mass tax state

The Second World War changed income tax again. The OBR says tax revenue reached 39% of GDP during the war.[16] More importantly, income tax became administratively normal for millions of workers.

The decisive administrative change was PAYE, Pay As You Earn, introduced in 1944. The OBR identifies PAYE as a major twentieth-century change because it meant governments could collect more income and other personal taxes directly from pay packets.[17] Before PAYE, income tax was more visible, episodic and administratively burdensome. After PAYE, it became automatic.

NICs were then expanded in 1948 to help pay for the new National Health Service and the state pension.[18] This is one of the most important moments in the history of the British fiscal state. The tax system had moved from periodic levies and trade taxes towards a permanent system of direct deductions from earnings.

For this period, the original table should not give a clean “income tax plus NI” figure. A better way to put it is this: in 1949, the IFS records income and wealth taxes as 44.8% of general government revenue and NICs as 8.8%.[19] Together, that is 53.6%, but it is a broad direct-tax category, not pure income tax plus NI.

1948 to the 1970s: welfare, inflation and the rise of NI

After 1945, Britain did not return to the small nineteenth-century state. Defence spending fell, but the welfare state expanded. The OBR describes the post-war period as involving a radical expansion and reshaping of the British state, with health, social security and education all taking larger shares of GDP.[20]

Income tax and NI became central to this settlement. The IFS says NICs “should probably be thought of as more like a tax on income than anything else” and records their rise from 8.8% of government revenue in 1949 to 16.4% in 1986.[21]

The 1970s also show why headline rates alone can mislead. In 1973, the basic rate of income tax was set at 30%. The top rate on earnings was left at 75%, then increased to 83% in 1974.[22] Investment income could face an even higher marginal rate: the IFS explains that the investment income surcharge could combine with the 83% top main rate to produce a 98% marginal rate on unearned income, though very few people actually paid it.[23]

The 1970s were also a fiscal drag decade. Before automatic indexation of the tax system, inflation eroded the real value of tax allowances. The IFS says this increased the state’s take from income tax by eroding allowances, while the shares of income tax and NI rose.[24]

1979 to 1990: Thatcher cuts headline rates, but income taxation remains central

The Thatcher governments are often remembered for cutting income tax. That is right, but it is only half the story.

The top rate on earnings was cut to 60% in 1979 and then to 40% in 1988. The basic rate also fell, from 35% in 1977 to 22% by 2000.[25] However, the IFS says the cost of those cuts was partly offset by removing allowances and reliefs and by the growth of higher-rate taxpayers as thresholds rose with prices rather than incomes.[26]

NI also became more like income tax. It began the post-war period closer to a flat contribution system. But graduation was introduced in 1961, it became more earnings-related in 1975, and the employer contribution ceiling was removed in 1985. The IFS describes this as a transformation from something closer to a poll tax into a near-replica of income tax.[27]

The important point is that lower headline rates did not mean the end of earnings taxation. The tax base broadened, NI became more significant, and direct taxation remained central to the state.

1999/00 to 2019/20: modern comparable data and the pre-pandemic picture

Comparable modern public-sector-receipts data are available from 1999/00. In that year, public sector receipts were 35.7% of GDP. Income tax raised 9.1% of GDP and NICs raised 5.4%, giving a combined figure of 14.5% of GDP. That means income tax plus NI provided about 40.6% of public sector receipts.[28]

By 2019/20, before the pandemic, public sector receipts were 36.5% of GDP. Income tax had fallen to 8.5% of GDP, while NICs had risen to 6.3%, giving a combined figure of 14.8% of GDP. That means income tax plus NI provided about 40.5% of public sector receipts.[29]

The Commons Library attributes the relative fall in income tax receipts before the pandemic partly to weak earnings growth and increases in the tax-free personal allowance, which meant fewer people paid income tax and, for most taxpayers, income tax was charged on less of their income.[30]

2020 to 2026: fiscal drag, frozen thresholds and wage stagnation

The modern period is defined by weak wage growth after the financial crisis, large increases in the personal allowance during the 2010s, and then the freezing of thresholds from the 2020s.

The House of Commons Library says recent strength in income tax receipts is due to wages and salaries growing faster than the economy and more income being dragged into higher tax rates. It explains that fiscal drag occurs when tax thresholds and allowances do not keep up with inflation or wage growth, meaning more of a taxpayer’s income becomes taxable.[31]

The personal allowance and higher-rate threshold are frozen from April 2022 until April 2031.[32] For 2026/27, income tax on earned income is charged at 20%, 40% and 45%. The personal allowance is £12,570, the higher-rate threshold is £50,270, and income above £125,140 is taxed at 45%.[33]

For NI, the main employee rate is 8% in 2026/27, charged between the primary threshold and upper earnings limit. Earnings above the upper earnings limit are charged at 2%. Employer NICs are 15% on earnings above the secondary threshold.[34]

The modern story is not simply that tax rates are high. It is that wage growth has been weak while thresholds have been frozen. Stephen Machin’s article in the LSE Public Policy Review puts the wage background starkly: “UK real wages have stagnated for the longest duration of the past two centuries”.[35] The same article says that real wage growth has stalled for the longest period for which comparable records exist, dating back to Victorian times.[36] This is the economic background against which fiscal drag feels especially painful.

Where are we now?

In 2025/26, UK public sector current receipts were £1,232 billion, equivalent to about 40% of GDP.[37] Income tax raised £330 billion, NICs raised £204 billion and VAT raised £183 billion.[38]

As a share of GDP, income tax raised 10.8% and NICs raised 6.7% in 2025/26. Together, that gives 17.5% of GDP.[39] Since total public sector receipts were 40.2% of GDP, income tax plus NICs represented about 43.5% of receipts.[40]

That is why income tax and NI sit at the centre of the modern British state. Customs and excise once dominated the fiscal system. Today, the payslip does.

Conclusion: the history of income tax is the history of the modern state

The history of British income tax is not a simple story of rates going up and down. It is a story about the state’s changing relationship with income.

In 1799, income tax was an emergency war tax. In 1842, it became a supposedly temporary way to support a freer-trade fiscal system. During the world wars, it became a mass instrument of national survival. After 1945, PAYE and NI made direct deductions from earnings central to funding the welfare state. From the 1980s onwards, headline rates fell, but the base broadened and NI increasingly acted as a second tax on earnings. In the modern period, fiscal drag has become one of the most important mechanisms by which government raises more revenue without openly increasing the main rates.

The result is that income tax and NI now sit at the heart of British government finance. A tax that began as an emergency response to Napoleon has become one of the main pillars of everyday government.

Footnotes and source list 

[1] Institute for Fiscal Studies, ‘National Insurance contributions explained’ (IFS Taxlab) https://ifs.org.uk/taxlab/taxlab-taxes-explained/national-insurance-contributions-explained accessed 3 July 2026.

[2] Matthew Keep, Tax statistics: an overview (House of Commons Library Research Briefing CBP-8513, 9 June 2026) https://researchbriefings.files.parliament.uk/documents/CBP-8513/CBP-8513.pdf accessed 3 July 2026, 9.

[3] UK Parliament, ‘War and the coming of income tax’ https://www.parliament.uk/about/living-heritage/transformingsociety/private-lives/taxation/overview/incometax/ accessed 3 July 2026.

[4] Julien Tissot, ‘1914–2014: One Hundred Years of Income Tax in France’ (2014) https://shs.hal.science/halshs-02527014v1/document accessed 3 July 2026.

[5] Isabela Mares and Didac Queralt, ‘Fiscal innovation in nondemocratic regimes: elites and the adoption of the Prussian income taxes of the 1890s’ (2020) 62 Explorations in Economic History 101352.

[6] National Archives, ‘16th Amendment to the U.S. Constitution: Federal Income Tax’ https://www.archives.gov/milestone-documents/16th-amendment accessed 3 July 2026.

[7] Keep (n 2) 4.

[8] Keep (n 2) 6 to 8.

[9] Tom Clark and Andrew Dilnot, Long-term trends in British taxation and spending (Institute for Fiscal Studies Briefing Note BN25, 2002) https://ifs.org.uk/sites/default/files/output_url_files/bn25.pdf accessed 3 July 2026, 5 to 6.

[10] UK Parliament (n 3).

[11] Luke Lanskey and Conor O’Loughnan, ‘300 years of UK public finance data’ (Office for Budget Responsibility, 20 July 2023) https://articles.obr.uk/300-years-of-uk-public-finance-data/index.html accessed 3 July 2026.

[12] Lanskey and O’Loughnan (n 11).

[13] Lanskey and O’Loughnan (n 11).

[14] Lanskey and O’Loughnan (n 11).

[15] UK Parliament, ‘Taxation during the First World War’ https://www.parliament.uk/about/living-heritage/transformingsociety/private-lives/taxation/overview/firstworldwar/ accessed 3 July 2026.

[16] Lanskey and O’Loughnan (n 11).

[17] Lanskey and O’Loughnan (n 11).

[18] Lanskey and O’Loughnan (n 11).

[19] Clark and Dilnot (n 9) 5.

[20] Lanskey and O’Loughnan (n 11).

[21] Clark and Dilnot (n 9) 5.

[22] Clark and Dilnot (n 9) 7 to 8.

[23] Clark and Dilnot (n 9) 8.

[24] Clark and Dilnot (n 9) 6.

[25] Clark and Dilnot (n 9) 8.

[26] Clark and Dilnot (n 9) 8.

[27] Clark and Dilnot (n 9) 8.

[28] Keep (n 2) 6 to 8.

[29] Keep (n 2) 6 to 10.

[30] Keep (n 2) 8.

[31] Keep (n 2) 8 to 9.

[32] Keep (n 2) 9.

[33] Francesco Masala, Antony Seely, Matthew Keep and James Mirza-Davies, Direct taxes: Rates and allowances for 2026/27 (House of Commons Library Research Briefing, 7 April 2026) https://commonslibrary.parliament.uk/research-briefings/cbp-10618/ accessed 3 July 2026.

[34] Masala, Seely, Keep and Mirza-Davies (n 33).

[35] Stephen Machin, ‘Wage Controversies: Real Wage Stagnation, Inequality and Labour Market Institutions’ (2024) 3(2) LSE Public Policy Review art 2 https://ppr.lse.ac.uk/articles/10.31389/lseppr.103 accessed 3 July 2026.

[36] Machin (n 35).

[37] Keep (n 2) 5.

[38] Keep (n 2) 5.

[39] Keep (n 2) 7 to 10.

[40] Keep (n 2) 6 to 10.