Why do dividends come with a 10% notional tax credit

A question about : Why do dividends come with a 10% notional tax credit

Assuming corporate tax is taxed at 20%, and a company has Ј100 in net profit before tax. The profit after tax is Ј80. Grossing it up for dividend purposes will give Ј88.89 (Ј80/0.9). This does not represent the basic rate tax of 20%. Can anyone please explain? I recall that it’s got something to do with equalising personal taxation with corporation tax? Thanks.

Best answers:

• Appears to be based around circumstances at the time it was brought in, not certain of the answer myself, as the rate significantly predates me becoming a practicing accountant - here is a debate on an accounting forum:
  https://www.accountingweb.co.uk/anyan.../10-tax-credit
  Seems that two possible answers are:
  1) To look good for the chancellor at the time as a tax 'reduction'
  2) Relating to overseas reclaims of the credit.
• At that time, Gordon was clearly planning to reduce corporation tax to just 10%. He brought it a 10% for small companies so was probably planning to extend it to all, bearing in mind the low CT rates of other countries. In the event, he didn't proceed with that plan and so the 10% tax credit rate remains an anomaly that has no logic nor reason. With a lot of tax related things, you should just accept they are what they are and not try to understand the reasoning as in a lot of cases, there is no logic - you'd just end up wasting your time and grey matter.
• Thanks Pennywise - I'd often wondered this myself, decided not to trouble my pretty little head about it, but felt guilty that really I ought to know.
  Now I know that I don't need to know. If you know what I mean.
• A basic rate tax payer is only charged 10% tax on dividends, the 10% tax credit completely satisfies this charge so there is no extra tax to pay.