Income tax in United Kingdom

The introduction of income tax

In order to help finance the Napoleonic war, the then prime minister, William Pitt, introduced income tax as a temporary measure. Income taxation, however, brought with it the necessity that the taxpayer must reveal his income. This was most unpopular and when the then prime minister, Henry Addington, re-introduced income tax in 1803 he chose a method of classifying income by its source and charged each source of income separately under a Schedule. Using this method, a taxpayer’s total income could not be ascertained without assessing and computing his income under each source or Schedule.

Income tax was last introduced by Sir Robert Peel in 1842 as a three-year temporary measure, but it has been with us ever since. There have been four consolidations since 1842, in the Income Tax Acts 1918 and 1952 and in the Income and Corporation Taxes Acts 1970 and 1988.

Over recent years, the Tax Law Rewrite Project has been commissioned with the task of rewriting the existing tax legislation into a more logical and ‘user-friendly’ format. The publication of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) covers income from employments, pensions and social security benefits and replaces the former Schedule E. The Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) covers income from trades, professions and vocations, income from property, savings income and investments. It replaces the six cases of former Schedule D, Schedule A and Schedule F. The Income Tax Act 2007 covers basic provisions about the charge to income tax, income tax rates, calculations and personal reliefs. It also deals with specific reliefs, such as EIS, VCT, etc. and trusts.

Introduction to income tax

Income tax is a tax on income, but also on some capital receipts.

The taxation of employment income is generally charged under the provisions of ITEPA 2003 from 6 April 2003.
The Income Tax Act 2007 received Royal Assent on 20 March 2007 and came into force on 6 April 2007. The Act covers basic provisions about the charge to income tax, income tax rates, the calculation of income tax liability, and personal reliefs; various specific reliefs (including relief for losses, the enterprise investment scheme, venture capital trusts, community investment tax relief, interest paid, gift aid and gifts of assets to charities); specific rules about trusts, deduction of tax at source, manufactured payments and repos, the accrued income scheme and tax avoidance; and general income tax definitions.
The Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) received Royal Assent on 24 March 2005 and took effect from 6 April 2005. The Act covers the taxation of trading, property, savings and investment and miscellaneous income.
Certain persons are exempt from all taxes on income and gains, while some are specifically exempt from income tax. Certain income is also exempt from income tax.

Law: ITA 2007; ITTOIA 2005; ITEPA 2003; Income Tax Act 2007 (Amendment) Order 2007 (SI 2007/940); Salisbury House Estate Ltd v Fry [1930] AC 432; Mitchell and Edon v Ross [1962] AC 813