ACCA Advanced Taxation (ATX) Practice Exam

How is the annual allowance charge taxed?

1. It is taxed first at the highest rate

2. It is not taxed

3. At the non-savings rate after dividends

4. It is taxed at the lowest available rate

The correct answer is: At the non-savings rate after dividends

The annual allowance charge is specifically related to the taxation of income, and this option correctly identifies the method of taxation that applies in this context. When considering the taxation of annual allowances for income, it is essential to understand the structure of tax rates in the UK, which consists of non-savings, savings, and dividend income categories. The annual allowance charge, being a component of general income, is subject to non-savings income tax rates after taking into account any dividends received. This means that the annual allowance charge isn't taxed at the highest rate or the lowest available rate in isolation; rather, it fits within the broader framework of how income is taxed, starting from the basic rate band up to higher or additional rates depending on total income. This option captures the idea that the treatment of the annual allowance charge is based on the progressive nature of income tax in the UK and reflects the order in which different types of income are taxed. Thus, it indicates that the annual allowance charge falls under the non-savings category for tax purposes after dividends have been accounted, aligning with how overall taxable income is calculated. The other options misinterpret the structure of income taxation or misclassify how the charge interacts with the taxpayer's overall income profile, leading to an incorrect