10% was never counted as the "basic rate" - it was always the next one up. So the removal of the 10% rate itself had no effect.
A "basic rate taxpayer" is currently someone whose marginal income tax rate is 20%.
Basic rate taxpayers (and share-holding companies) don't have to worry about tax on dividends: it has been paid by the company paying the dividend. In other words, the net amount received is the same as the gross amount less the tax due. The gross amount of dividend declared is:
net div ÷ (1 - basic tax rate) = gross div (where tax rate is rate payable on dividends)
and since the net amount actually received is net of this tax, there is no more tax to pay. However, a higher rate taxpayer would declare the same gross amount, and, having received the net amount (so effectively having paid basic rate tax), would still have a further amount to pay:
{(higher rate tax)×(gross div)} - {gross div - net div}
where the first term is the total tax due (based on higher tax rate payable on dividends); the second term is the tax already effectively paid.
Hope that makes sense!
Last edited by a moderator: Apr 18, 2009