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The end of the Second World War in 1945 left Britain victorious but financially crippled. The national debt stood at an eye-watering 250% of GDP, and the nation was embarking on one of the most ambitious social projects in its history: the creation of the welfare state and the National Health Service. This monumental task of rebuilding the country and caring for its citizens had to be paid for. The solution, for successive governments, was taxation.
This article delves into the fascinating and often fraught history of taxation in the UK since WWII. By understanding how we got here, we can open up a more informed debate about the choices we face today in tackling the national debt.
For most people, tax means income tax. In the immediate post-war years, this burden was immense. The top rate of income tax, which had been hiked to fund the war, remained at a staggering 99.25%. While this only affected the very wealthiest, the rates were high across the board. The basic rate was 45%, and even those on modest incomes found a significant portion of their pay packet going to the Treasury.
What did this mean for citizens? It meant that for many, the post-war "austerity" was a reality enforced by the taxman. While there was a strong sense of collective purpose in rebuilding the nation and funding the new NHS, contemporary accounts speak of a populace "groaning under the weight of taxes." For the "professional classes," such as doctors and lawyers, these high rates were a significant disincentive to earn more, a phenomenon that sparked debates about productivity that echo to this day.
The following decades saw a gradual, though not steady, decline in income tax rates. The Conservative governments of the 1950s and early 60s chipped away at the rates, but it was the arrival of Margaret Thatcher in 1979 that truly shifted the landscape. Arguing that high taxes stifled enterprise, her government slashed the top rate from 83% to 60% and then to 40% in 1988, while the basic rate was cut to 25%.
Since the 1990s, the headline rates have been less dramatic, but the tax burden has continued to rise through "stealth taxes." The freezing of personal allowances and tax thresholds has meant that as wages have risen with inflation, millions of people have been dragged (fiscal drag) into paying tax for the first time or pushed into higher tax brackets. This has left the UK with its highest tax burden in 70 years, bringing us full circle to the post-war era, but in a very different economic climate.
At present (2025/26 tax year), the system remains complex. In England, Wales, and Northern Ireland, the tax-free Personal Allowance is £12,570. After that, there is a 20% basic rate, a 40% higher rate, and a 45% additional rate for the highest earners. Scotland has its own set of six tax bands, with rates ranging from 19% to 48%, reflecting a different approach to progressivity.
Until 1965, companies were taxed in a similar way to individuals, paying income tax and a profits tax. The Labour government of Harold Wilson introduced a single Corporation Tax to simplify the system. The initial rate was 40%.
The story of corporation tax since then is one of a race to be competitive. The belief that lower taxes on business profits attract investment and jobs has been a powerful driver of policy. From the 1980s onwards, the UK's corporation tax rate was steadily cut, falling from 52% in the early 80s to just 19% by 2017, one of the lowest in the developed world.
What did this mean for the UK? Proponents argued that it made the UK an attractive destination for multinational companies to set up headquarters, bringing jobs and investment. However, critics pointed to the loss of revenue and questioned whether these companies were paying their "fair share." The debate intensified after the 2008 financial crisis, leading to a global conversation about corporate tax avoidance. In a significant reversal of the long-term trend, the government increased the main rate of corporation tax to 25% in 2023, a move designed to raise revenue to help repair the public finances.
At present (2025/26 tax year), the main rate of Corporation Tax remains at 25% for companies with profits over £250,000. To support smaller businesses, a 19% rate applies to companies with profits under £50,000, with a system of marginal relief for profits between these two figures.
Inheritance tax, or IHT, is consistently cited as one of Britain's most disliked taxes, despite the fact that only a small minority of estates—around 4%—actually pay it. Its predecessor, Estate Duty, was a formidable beast. In 1949, the rate was increased to 80% on the largest estates, and it peaked at 85% in 1969.
What did this mean for citizens? For the landed aristocracy and wealthy families, these rates were transformative, accelerating the breakup of large estates that had been in families for centuries. The National Trust acquired many stately homes during this period as owners were forced to give them up in lieu of tax.
In the 1970s, Estate Duty was replaced by Capital Transfer Tax, which also taxed lifetime gifts to prevent avoidance. The Thatcher government, in 1986, replaced this with the modern Inheritance Tax, which is levied at a flat rate of 40% above a certain threshold (the nil-rate band). While most lifetime gifts are now exempt if the person lives for seven years after making them, the tax remains a source of controversy. The significant rise in property prices over the last few decades has meant that more and more families, particularly in the South East of England, are finding themselves caught in the IHT net, turning a tax designed for the super-rich into a middle-class concern.
At present (2025/26 tax year), the standard IHT rate is 40%. The tax-free threshold, or nil-rate band, is £325,000. An additional residence nil-rate band of £175,000 is available if a main home is passed to direct descendants. As these allowances are transferable between spouses, a couple can potentially pass on up to £1 million tax-free.
For many years, the profit made from selling an asset, like shares or a second home, was tax-free. This created a huge incentive for the wealthy to convert their income into capital to avoid the high rates of income tax. To close this loophole, the Labour government introduced Capital Gains Tax (CGT) in 1965.
Initially, the rate was 30%. The rules have been tinkered with by almost every subsequent government. In 1988, Nigel Lawson aligned the CGT rates with income tax rates, meaning the top rate rose to 40%. Later, taper reliefs were introduced to reward long-term investment, only to be abolished in favour of a flat rate of 18% in 2008.
Today, we have a tiered system, with basic rate taxpayers paying 10% (18% on residential property) and higher rate taxpayers paying 20% (28% on residential property). The annual tax-free allowance has also been slashed recently, bringing more small-scale investors and sellers of assets into the tax net. The history of CGT reflects a continuous tension in the tax system: how to tax the proceeds of wealth without discouraging the investment that helps the economy grow.
At present (2025/26 tax year), the tax-free allowance for Capital Gains Tax has been reduced to £3,000. For gains above this amount, basic rate taxpayers pay 18% on most assets, while higher rate taxpayers pay 24%. The rates are higher for gains on residential property (except primary resident where there is no Capital Gains Tax), standing at 18% and 24% respectively.
Value Added Tax (VAT) was introduced in the United Kingdom on 1 April 1973. It is a consumption tax that is paid on most goods and services and is a significant source of government revenue. The introduction of VAT was a condition of the UK's entry into the European Economic Community (EEC), the forerunner to the European Union, and it replaced the previous Purchase Tax system.
The Standard Rate of VAT: When it was first introduced, the standard rate of VAT was set at 10%. However, this rate has fluctuated over the years in response to the economic and political climate:
1974: The standard rate was reduced to 8%. At the same time, a higher rate of 25% was introduced for petrol and some luxury goods.
1979: The higher rate was abolished, and the standard rate was almost doubled to 15%.
1991: The standard rate was increased to 17.5%.
2008: In response to the global financial crisis, the standard rate was temporarily cut to 15% to encourage consumer spending.
2010: The rate returned to 17.5%.
2011: The standard rate was increased to its current level of 20%.
Other VAT Rates: Alongside the standard rate, there are other VAT rates that apply to specific goods and services:
Reduced Rate: Currently at 5%, this rate applies to items such as domestic fuel and power, and children's car seats. The reduced rate was first introduced in 1994 at 8% for domestic fuel and power, and was lowered to 5% in 1997.
Zero Rate: A zero rate of VAT (0%) is applied to most essential goods and services, including most food, books, newspapers, and children's clothing. These items are still VAT-taxable, but the rate charged to consumers is 0%.
VAT Today: The current standard rate of VAT in the UK is 20%, with a reduced rate of 5% and a zero rate for certain goods and services. The rules and regulations surrounding VAT are complex and have been subject to change, most notably with temporary reductions for the hospitality sector during the COVID-19 pandemic. VAT remains a cornerstone of the UK's tax system, adapting to the country's economic needs.
See the VAT Deep dive covering the history of VAT in UK.
The journey of UK taxation since WWII has been a roller coaster. We have moved from an era of very high taxes on income and wealth to fund post-war reconstruction, to a period of tax cutting in the 1980s aimed at stimulating enterprise, and now back to a high-tax environment to deal with the economic shocks of recent years.
This history does not provide easy answers to the question of how to manage the UK's national debt. Instead, it presents us with a series of crucial questions that should be at the heart of our national debate:
The choices made by post-war chancellors shaped the Britain we live in today. The choices we make now on tax and debt will define the Britain of tomorrow. It's a debate we must all be part of.