Div tax rebate

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Can someone explain to me why the div tax credit can't produce a tax rebate like savings? Surley if this tax has been deducted at source then you should be able to get a rebate if you don't pay tax?

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Div tax rebate

    The 10% rate on dividends is a notional rate and is not actually paid by anyone. The company paying the div will pay Corporation Tax on it's profits unlikew the good old days when it paid Advance Corp. Tax on dividends paid or payable.

    Since no one has paid the 10% tax in the first place then no refund is due if the individual is not liable to income tax.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Div tax rebate

    Thanks so when you gross it up it's not like with savings when you are saying that if you hadn't paid the tax on int you would have received X gross amt. The gross amount after grossing up divs is like an artificial gross amt. What is the point in having a tax credit? It seems to benefit the individual and not inland revenue which is unusual ;-)
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Div tax rebate

    The 10% tax credit is a %age figure which has been in tax legislation for years and years and it is not commonly known why it is 10%.

    The 10% notional tax is charged because dividends are paid out of post-tax profits - in other words the income received by the shareholder in the form of dividend has already been subject to tax under the corporation tax regime.

    If you receive £1,000 in dividends you have received a "net" dividend and as a result this has to be gross up using the fraction £1,000 x 100/90 to arrive at the gross dividend.

    The actual 10% "deduction" is not paid to any 3rd party, not even HMRC therefore having a "nil effect". It is a procedural function of dividend calculation.

    Kind regards
    Steve
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Div tax rebate

    At the time the legislation was changed, about 1998, I think, the rate of 10% was chosen as an interim measure as the previous rate was 20%. The legislation was never completed but the calculation to demonstrate the 32.5% rate is a work of art!

    Div. received 80
    Old standard rate tax 20
    Gross div 100

    Tax paid by higher rate
    payer 40
    Net div 60
    Additional tax payable 20 (20 tax credit)

    New gross div 80x100/90 88.9
    Cash to be rec'd
    (same as before) 60
    Tax suffered 28.9
    Rate of tax 28.9/88.9 32.5%

    Additional tax payable 28.9-8.9 = 20 as before!

    Great eh!

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