The new Conservative Prime Minister, Stanley Baldwin, appointed Winston Churchill as Chancellor in November 1924. Churchill's budget of 1925 was a major reinstatement of fiscal policy. It used several creative accounting devices, allowing him to run a budget deficit while giving the impression that the budget was in balance. Due to his belief that the existence of large 'landlord class' could stifle the creation of wealth, Churchill intended to increase the difference between tax on investment and earned income.
Churchill granted tax relief on earned income to the lower range of super-taxpayers earning around £3000 per annum, and to those earning below super-tax incomes of between £500 and £1000. This created a 'dip' in the percentage paid in tax on income between £300 and £600, helping to secure the political support of the lower middle class and the higher earning working class. Churchill maintained the rates of super-tax for high earners and increased death duties on large estates.
In 1926 Churchill also raised a tax on motor vehicles for the first time, and considered methods of preventing tax evasion by companies. Winston Churchill's policy was abhorrent to Labour, as it had assisted super-tax payers without making concessions to low earners, who were also subject to the regressive payment of a flat rate for pensions. In his 1930 budget, the Labour Chancellor, Philip Snowden, increased the level of surtax on large incomes and death duties. He also added six pence in the pound on the standard rate, but extended the lower band so that lower middle-class incomes were not affected.
International depression struck in 1931. The government was faced with two alternatives. It could accept budget deficit and increase taxation and spending, particularly on welfare, to raise demand and stimulate the economy. Otherwise it could attempt to prevent a deficit by reducing spending. Snowden argued that taxes could be increased no further, and the May Committee on National Expenditure recommended widespread cuts in spending. Following the formation of the National Government in August 1931, however, Snowden imposed more indirect taxes. He increased the standard rate, reduced allowances to increase the number of taxpayers by a million, and increased surtax by ten per cent. The measures hit the lower-middle classes, previously protected by Churchill's system.
Neville Chamberlain was appointed Chancellor in November 1931. He sought to encourage business and industry while limiting the deficit by reducing taxes and welfare spending. He also increased married men and children's allowances, while offering a concession to small landlords by abolishing differential tax on incomes of less than £500 per annum. This reintroduced a system that was more favourable to lower middle-class income of around £500 to £700.
By 1937 Chamberlain faced the financial demands of rearmament. He raised the standard rate of taxation, but also introduced a new measure - the National Defence Contribution (NDC). This was to be used specifically for rearmament over a period of five years.