Why do we have a 10% tax credit and a 10% tax?

[TheCyclingProgrammer]

With you now.

I wasnt clear. Agreed the rate doesnt go up. The tax paid on receipt does.

Indeed. A £10k dividend at the higher rate currently incurs tax of £2.5k in tax (where £10k is treated as net of the tax credit). If there was no tax credit, £10k would be treated as the gross and would incur £3250 in tax.

[VectraMan]

It's because the tax system is designed to keep accountants in work.

10% tax with a 10% credit. It's beyond insanity.

[ASB]

It's because the tax system is designed to keep accountants in work.

10% tax with a 10% credit. It's beyond insanity.

Well it is actually a 10% credit that satisfies a nominal 20% liability. Just to make it all incredibly simple transparent and obvious.

[PerfectStorm]

The difference between this and just treating basic rate dividends as 0% is that even though the effective tax rate is nil, it's still the gross amount that counts towards your total income and therefore affects how much you can take in dividends before you reach the higher rate threshold.

Isn't this the end result, rather than the rationale?

[philip@wellwoodhoyle]

The only "rational" explanation was that Gordon was aiming for 10% starting rate for both personal tax and corporation tax. In actual fact, that was the case for a very short timescale as we did have a starting rate of personal tax of 10% and a small company rate of corporation tax of 10%.

Of course, in reality, neither stood the test of time, so we are left with an anomaly of a 10% tax credit, the only purpose for which is to cause confusion. Prior to Gordon's messing around, the tax was real, not notional, the company paid advance corporation tax at 25% when the dividend was paid and the recipient got a credit for that same amount which could be reclaimed if appropriate. At least in those days it was real and meant something!

The same effect could be achieved with 20% tax credit or 0% tax credit if the dividend tax rates were amended accordingly.

Best not to think too much about the why's and wherefore's of it - just accept it as it stands. If we tried to apply logic to tax laws, we'd all be in an asylum, gone mad with trying to work out why things are the way they are. I'm sure others had the same, but my first tax lecturer spent his first lesson with us telling us to forget any notion of trying to work out the logic of tax rules - he made it absolutely clear that we weren't to waste our brain cells, but to instead just follow the rules and not worry about the logic!

[TheCyclingProgrammer]

Isn't this the end result, rather than the rationale?

I suppose. In which case, what Phillip said.

[PerfectStorm]

Thanks all for your thoughts. So the consensus seems to be "it is what it is", it got there because of a series of historical fixes/sticking plasters, and has no effect other than to bring you closer to the taxable limit whilst not paying any actual tax until you get there.

Clear as mud