ACCA Advanced Taxation (ATX) Practice Exam

If a person's threshold income exceeds £200,000 but their adjusted income is less than £240,000, what happens to their annual allowance?

1. It is reduced

2. It is entirely lost

3. It remains unchanged

4. It is increased

The correct answer is: It remains unchanged

When assessing the annual allowance for pension contributions in relation to threshold and adjusted income, it is important to understand the definitions of these terms and how they impact the annual allowance. Threshold income is the measure used to determine if an individual has exceeded the initial limit, which is set at £200,000. If a person's threshold income exceeds £200,000, it suggests they are moving into a scenario where their annual allowance may be subject to reduction. However, adjusted income, which includes all taxable income and any pension contributions that exceed the annual allowance, comes into play as well. In this case, since the person's adjusted income is less than £240,000, they have not surpassed the upper limit which triggers a reduction in the annual allowance. The annual allowance is reduced only when adjusted income exceeds £240,000. Therefore, when threshold income exceeds £200,000 but adjusted income remains below £240,000, the individual retains their full annual allowance, which means it remains unchanged. This framework allows for a situation where individuals can still contribute the maximum to their pensions, as they are not subject to the penalties of the reduced allowance due to not crossing the adjusted income threshold. Ultimately, the correct understanding leads to the conclusion that the annual allowance remains unchanged