In the United Kingdom, the Advance corporation tax (ACT) was the scheme under which companies made an advance payment of tax when they distributed dividend payments to shareholders. The principle is similar to the way that interest earned on bank deposits in the UK normally has basic rate tax deducted by the bank before being paid to the account holder.
In general this payment meant that the recipients of the dividend were considered to have already paid basic rate tax on their dividend income. Certain recipients, including pension funds, who would not otherwise have paid income tax on the dividend income were entitled to claim back this (or later a lesser) amount from the treasury.
The amount of ACT paid by a company could also be offset against the company's profits reducing its final corporation tax bill.
ACT was introduced in 1973 at a rate of 30% (the basic rate of income tax at that time). Until 1993 the income tax rate payable on dividends was the same as any other income. From 1973 until 1993 the ACT rate was adjusted to keep it the same as the basic rate of income tax. In 1993 the ACT rate was cut to 22.5%. At the same time the rate of income tax payable on dividends (20%) was for the first time set at a different rate to that payable on other income (25%). The tax relief payable was tied to the 20% rate rather than the ACT rate meaning that non-taxpayers could no longer reclaim the full amount that had previously been taken by the exchequer as ACT.