ACCA Advanced Taxation (ATX) Practice Exam

How is the annual allowance (AA) for pensions reduced if threshold income exceeds £200,000?

1. By a fixed amount of £10,000

2. By (adjusted income - £240,000) x 50%

3. Only reduced if income exceeds £500,000

4. Not reduced at all for threshold income

The correct answer is: By (adjusted income - £240,000) x 50%

The annual allowance (AA) for pensions is indeed reduced using the method outlined in option B, which states that the reduction is calculated by taking the adjusted income, subtracting £240,000, and then applying a factor of 50%. This mechanism is a part of the tapering of the annual allowance, which applies to individuals whose threshold income exceeds £200,000. When threshold income surpasses the £200,000 limit, the annual allowance begins to taper down. For every £2 of income over the £240,000 threshold, the annual allowance is reduced by £1, meaning the calculation uses (adjusted income - £240,000) and divides by 2 to determine how much of the annual allowance is lost. The maximum reduction can continue until the annual allowance reaches a minimum level of £4,000 when adjusted income is £312,000 or more. This approach is designed to limit the tax advantage given to individuals with higher earnings, ensuring that pension tax relief is more targeted and benefit-focused, while still allowing a degree of tax-advantaged saving for those at lower income levels. The other options do not accurately reflect the tapering mechanism. A fixed amount reduction would not account for varying income levels above the threshold