Steven Forbes of Alan Steel Asset Management looks into how the history of taxation should inform the forthcoming UK Budget.

As some of you may be aware, Income Tax was first introduced as a temporary measure to help fund the cost of fighting the Napoleonic Wars. The top rate at that time was 10%. After the wars were over it was removed, but reintroduced in 1842 by Sir Robert Peel as a way of funding a growing budget deficit. National Insurance was expanded in 1946 by Clement Atlee to help fund the deficit that had accrued as a result of World War II. It is now charged at a combined rate of 23.8% between employer and employee contributions. Deficits have always resulted in new ways of taxing people, and even though may be deemed temporary, once introduced seem awfully hard to budge.

So what will happen next week when Alistair Darling makes his Budget speech to the House of Commons?

Well let us review exactly where we are. Firstly, the deficits above were all substantially less than one we are faced with at present. Secondly, we now have a far greater welfare state and Civil Service final salary pension schemes to fund, and Jacqui Smith’s bathroom to furnish. Lastly, we are likely to be less than a year from a General Election. Oops!

When he was Chancellor, Gordon Brown, last seen acting like the school geek who finally got a chance to hang with the “cool kid” when President Obama was over at the recent G20 summit, presided over some of the most deceptive Budgets in recent memory. The headlines were pretty bland, but the small print contained all sorts of “nasties”. Even he, however, would be hard pushed to hide the amounts of tax that will have to be raised this time.

There have been a number of predictions made as to what changes may be announced. One of these was increasing Capital Gains Tax from 18% back to 40%. However, as hardly anyone has substantial gains to realise, I personally cannot see the attraction in this as a way of raising revenue in the short term. It has already been announced that Income Tax will rise to a top rate of 45% in 2010, so that seems pretty much covered, and the business community, which is already struggling due to the recession can hardly be expected to pay more Corporation Tax or National Insurance. The property market is on its knees so increasing Stamp Duty would also appear unlikely.

So what’s left? Well the one tax that has remained untouched since Labour came to power in 1997 is Inheritance Tax (IHT). I have always thought this strange, as previous Labour governments were very keen to tax the estates of the wealthy, but apart from increasing the tax free threshold by inflation each year, it is exactly the same as under the Tories. The current rate is 40% but Income Tax is rising from that rate so why not IHT?

As for new taxes, unlike a number of European countries the UK does not have a Wealth Tax. This tax is collected annually and is based on the total value of an individual’s wealth. There were rumours of something like this being introduced years ago, and although nothing came of it at the time, I would be surprised if this option has not been looked at once more.

Unfortunately there is not a great deal of pre-budget planning that can be done when we are dealing with the unknown, but as the amount we pay in taxes is bound to rise, trying to make use of the few tax breaks we do get, such as your annual ISA and Capital Gains allowances makes sense. Those with sufficient earnings should consider making contributions to their pensions as higher rate relief may well be diminished, or even removed, in the future.

Oh, before I forget, there was one other tax that was introduced to meet a budget deficit. In 1696, King William III decided he would tax people based on the number of windows they had in their properties, however, given the number of homes owned by our MP’s, I doubt this will be reintroduced!

Steven Forbes is managing director of Alan Steel Asset Management, based at Linlithgow.