ACCA Advanced Taxation (ATX) Practice Exam

How is the Personal Allowance (PA) calculated?

1. Based only on taxable income

2. Based on adjusted net income

3. Based on total net income

4. Fixed amount regardless of income

The correct answer is: Based on adjusted net income

The correct method for calculating the Personal Allowance (PA) is based on adjusted net income. This approach considers various factors that may affect an individual's tax situation. Adjusted net income encompasses income from all sources, but it also takes into account certain deductions, such as contributions to pension schemes and gift aid payments, which can reduce the overall income to determine the allowance level. For individuals with an adjusted net income below a specific threshold, they are entitled to receive the full Personal Allowance. As their adjusted net income increases, the allowance starts to reduce until it is completely phased out for those whose income exceeds a high limit. Therefore, the PA is not simply derived from the total taxable income or net income, but rather from adjusted net income, reflecting the more comprehensive measure of an individual's financial standing for tax purposes. In summary, using adjusted net income ensures a fairer assessment of eligibility for the Personal Allowance by accounting for relevant deductions that lower the amount subject to income tax, ensuring that the system supports those with lower overall taxable capacity.