ACCA Advanced Taxation (ATX) Practice Exam

How is the "personal allowance" relevant in tax planning for couples?

1. It cannot be transferred regardless of income levels.

2. It can be shared to optimize tax savings.

3. It is only applicable to single individuals.

4. Higher earners must forfeit their personal allowances completely.

The correct answer is: It can be shared to optimize tax savings.

The concept of the "personal allowance" is pivotal in tax planning, particularly for couples. The personal allowance refers to the amount of income that an individual can earn before they start paying income tax. When considering tax optimization for couples, sharing or transferring the personal allowance can significantly impact their overall tax liability. By potentially transferring any unused portion of one partner's personal allowance to the other, where applicable, couples can ensure that both partners maximize their tax efficiency. For example, if one partner earns significantly less than the other and does not utilize their full personal allowance, that unused part may be transferable to the higher-earning partner. This strategy allows the higher earner to reduce their taxable income, resulting in lower tax payments overall, thereby maximizing the overall tax savings for the couple. This reinforces the importance of collaborative tax planning in couples’ financial strategies, as it enables them to navigate the nuances of personal allowances for optimum benefits. While some other options refer to limitations or inapplicability, they don't represent the flexibility and strategic advantage that sharing the personal allowance provides in effective tax management.