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Notes to the financial statements

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8 Income tax expense

	2007 £m	2006 £m
Current tax expense
Current year	2	38
Over provision in prior years	(25)	(2)
	(23)	36
Deferred tax expense
Origination and reversal of temporary differences	158	15
Under/(over) provision in prior years	18	(5)
	176	10
Total income tax expense in income statement	153	46
Income tax expense on underlying profit1	132	95
Tax on items below:
Sale of properties	(3)	—
Financing fair value movements	2	(3)
Business Review operating costs	—	(15)
IT insourcing costs	—	(19)
Debt restructuring costs	—	(12)
Past service gains on defined benefit schemes	22	—
Total income tax expense in income statement	153	46

1. Tax charge attributable to underlying profit before tax from continuing operations.

The effective tax rate of 32.2 per cent (2006: 44.2 per cent) is higher than the standard rate of corporation tax in the UK. The differences are explained below:

	2007 £m	2006 £m
Profit before taxation	477	104
Income tax at UK corporation tax rate of 30% (2006: 30%)	143	31
Effects of:
Disallowed depreciation on UK properties	22	21
Non-deductible expenses	3	1
Non-taxable income	(8)	—
Over provision in prior years	(7)	(7)
Total income tax expense in income statement	153	46

Income tax charged or credited to equity during the year is as follows:

	2007 £m	2006 £m
Share-based payment tax deductions recognised directly in equity
Current tax payable	(2)	—
Deferred tax asset	(7)	(5)
Deferred tax losses associated with share-based payment tax deduction	(8)	—
	(17)	(5)
Deferred tax on items recognised directly in equity
Actuarial gains/losses on defined benefit pension schemes	52	(75)
Available-for-sale financial assets – fair value movements	7	7
	59	(68)
	42	(73)

On 21 March 2007, the Chancellor announced that with effect from 1 April 2008 the standard rate of UK Corporation tax will reduce from 30 per cent to 28 per cent (note 21).

9 Earnings per share

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding those held by the Employee Share Ownership Plan trusts (note 25), which are treated as cancelled. For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potential dilutive ordinary shares. These represent share options granted to employees where the exercise price is less than the average market price of the Company's ordinary shares during the year.

Underlying earnings per share is provided by excluding the effect of any gain or loss on the sale of properties, impairment of goodwill, financing fair value movements and one-off items that are material and infrequent in nature. This alternative measure of earnings per share is presented to reflect the Group’s underlying trading performance.

All operations are continuing for the periods presented.

	2007 million	2006 million
Weighted average number of shares in issue	1,691.3	1,679.0
Weighted average number of dilutive share options	28.5	13.2
Total number of shares for calculating diluted earnings per share	1,719.8	1,692.2
	£m	£m
Profit for the financial year attributable to equity holders of the parent	325	64
(Less)/add: profit on sale of properties, net of tax	(10)	(1)
financing fair value movements, net of tax	(6)	7
Business Review costs, net of tax	—	36
IT insourcing costs, net of tax	—	44
debt restructuring costs, net of tax	—	26
profit on part disposal of Sainsbury’s Bank	(10)	—
past service gains on defined benefit schemes, net of tax	(50)	—
Underlying profit after tax	249	176
	pence per share	pence per share
Basic earnings	19.2	3.8
Diluted earnings	18.9	3.8
Underlying basic earnings	14.7	10.5
Underlying diluted earnings	14.5	10.4

10 Dividend

	2007 pence per share	2006 pence per share	2007 £m	2006 £m
Amounts recognised as distributions to equity holders in the year:
Final dividend of prior financial year	5.85	5.65	99	95
Interim dividend of current financial year	2.40	2.15	41	36
	8.25	7.80	140	131

After the balance sheet date, a final dividend of 7.35 pence per share (2006: 5.85 pence per share) was proposed by the Directors in respect of the 52 weeks to 24 March 2007, resulting in a total final proposed dividend of £126 million (2006: £99 million). The proposed final dividend has not been included as a liability at 24 March 2007.