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World War II and PAYE

A cartoon  picture of Commissioners of the Inland Revenue
Two Commissioners of Inland Revenue Comparing Methods

Bicentenary of Income Tax

Learning from the lessons in 1914, the outbreak of the Second World War saw immediate action to raise extra revenue for the war effort. ‘Finance is the fourth arm of defence’, said Chancellor Sir John Simon in the first war Budget.

In 1939, the standard rate of income tax was 29% with surtax at 41% for incomes over £50,000. Ten million people were liable for tax, and the total sum raised was £400 million.

Successive increases in rates and lowering of allowances led to 1944-45 figures of 50%, surtax at 48% for incomes over £20,000, fourteen million taxpayers and nearly £1,400 million raised.

An Excess Profits Tax introduced for business raised further revenue (£508 million in 1944-45). It compared war-time profits with pre-war or ‘standard’ profits, taxing the difference initially at 60% and then at 100%. It was repealed in 1946.

Post-war credits
The burden of taxation during the war was high, although it was accepted as a necessary price to pay to defeat Nazi Germany.

In a unique arrangement, the additional tax paid as a result of the lowering of personal allowances was recorded and credited to the taxpayer. It was repaid - to those who had kept their post-war credit certificates - by 1973.

Businesses benefited in a similar way with a 20% refund of Excess Profits Tax paid at 100%. These payments, aimed to boost reconstruction, were paid soon after the end of the war.

Pay As You Earn
The growing number of taxpayers during the war led to the need for a more efficient tax collection system, and Pay As You Earn - PAYE - was introduced in 1944 as a result.

In place of annual or twice-yearly collections, tax was deducted by employers from wages weekly or monthly and an employee leaving work was given a P45 recording his or her code number, pay to date and tax paid to date to pass on to a new employer.

The British scheme had been piloted by Churchill’s Chancellor Sir Kingsley Wood from 1940-41. On the day it was to be announced, Wood collapsed and died. But by the end of January 1944, fifteen million people - anyone earning £100 a year or more - had received notices telling them their code number. In the Inland Revenue’s first exercise in public relations, staff visited work places to discuss the system with employers and employees.

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