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

[PerfectStorm]

As title. Rookie question I know, but for the purposes of paying tax on dividends, earnings are grossed up 10% then taxed at 10%, meaning there is effectively no tax at this level. So why do it at all? Why not instead make it 0% tax up until 41865 then start taxing from there? What am I missing?

[DaveB]

As title. Rookie question I know, but for the purposes of paying tax on dividends, earnings are grossed up 10% then taxed at 10%, meaning there is effectively no tax at this level. So why do it at all? Why not instead make it 0% tax up until 41865 then start taxing from there? What am I missing?

I think you are getting confused. CT rate is 20%.

If you stay below the upper rate threshold, then yes, you will in effect pay 0% in income tax. However most non-contractors do not get the bulk of their income from dividends so the personal allowance and thresholds do matter.

[TheCyclingProgrammer]

I think you are getting confused. CT rate is 20%.

Where did OP mention CT? Basic rate on dividends is, as OP said, 10% but is paid by way of an automatic tax credit.

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.

[ASB]

By notional it effectively just means non reclaimable. E.g my kids used to be able to reclaim it from their assets I held in trust. Removal of this effectively meant they got no tax allowances. But I digress.

if it were removed then anybody who is over basic rate would pay 42.5 on that slice not 32.5.

Given it is income paid from profits that have been fully taxed, often at a rate of 28 then this might been as a little harsh. Bringing the effective total rate on this for middle income earners to over 60.

The credit is supposed to recgnise at least to a partial extent - previously fully - that the income had previously been fully taxed.

[Jessica@WhiteFieldTax]

In the past the credit equated to basic rate tax band, and recognised that as corporate profit, from which dividends are paid, have been taxed at CT rates then there should be a basic rate credit.

It was a more transparent and logical then.

1988 budget, as I recall, Gordon Brown restricted reclaimable tax credits for charities and pension funds, and the 10% rate and credit was introduced then as a fudge to minimise the impact on charities (as I recall). Basically it was GBs raid on pension schemes, and why most DB schemes are now in deficit.

[TheCyclingProgrammer]

I didn't know Gordon Brown was a secret Tory back in the 80s Jessica.

[TheCyclingProgrammer]

if it were removed then anybody who is over basic rate would pay 42.5 on that slice not 32.5.

No, it would still be 32.5%. Currently it's 22.5% of the gross after the tax credit, or effectively 25% of the net amount.

[ASB]

No, it would still be 32.5%. Currently it's 22.5% of the gross after the tax credit, or effectively 25% of the net amount.

Baffled. If the credit were removed it would go up. There will be no credit to offset a part of it against.

I very much doubt the credit will be removed. But it would by defined tion affect anybody that is currently aboe to offset it. I.e. non basic rate payers who have elements of income via dividends.

[TheCyclingProgrammer]

Baffled. If the credit were removed it would go up. There will be no credit to offset a part of it against..

Why would it go up? The rate is 32.5% before the application of the tax credit. If the credit was abolished, the rate would remain unchanged but the amount of tax paid would go up.

[ASB]

Why would it go up? The rate is 32.5% before the application of the tax credit. If the credit was abolished, the rate would remain unchanged but the amount of tax paid would go up.

With you now.

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