ACCA Advanced Taxation (ATX) Practice Exam

If an individual's adjusted net income is greater than £100,000, and after implementing loss relief, is there a resultant tax saving?

1. No, there would be no additional tax saving

2. Yes, but only if their losses exceed the limit

3. Yes, additional tax saving is possible if the personal allowance is restored

4. Additional tax saving is irrelevant in this scenario

The correct answer is: Yes, additional tax saving is possible if the personal allowance is restored

When an individual's adjusted net income exceeds £100,000, their personal allowance begins to be tapered away. For every £2 of income over this threshold, the personal allowance is reduced by £1. This means that individuals with adjusted net incomes significantly above £100,000 can lose their personal allowance completely, leading to an increased tax burden. When loss relief is applied, particularly if the losses are significant, this can effectively reduce the adjusted net income back below the £100,000 threshold. If the individual's adjusted net income falls to or below this level as a result of claiming loss relief, they may regain part or all of their personal allowance. Since the personal allowance provides a tax-free portion of income, restoring it can lead to further tax savings due to less taxable income. This is why the correct response indicates that additional tax saving is possible if the personal allowance is restored; it highlights the direct link between applying loss relief to adjusted net income and potentially salvaging the personal allowance, which in turn reduces the individual’s overall tax liability. In contrast, the other options do not accurately capture the nuance of tax relief mechanisms related to personal allowances and adjusted net income.