ACCA Advanced Taxation (ATX) Practice Exam

Taxpayers with an income between £100,000 and £125,140 should consider what strategy?

1. Reduce their taxable income by increasing savings.

2. Make contributions to reduce their adjusted net income.

3. Invest in property to gain additional tax deductions.

4. Increase their taxpayer status for greater benefits.

The correct answer is: Make contributions to reduce their adjusted net income.

Taxpayers with an income between £100,000 and £125,140 should focus on making contributions to reduce their adjusted net income, as this is particularly relevant due to the loss of personal allowance that occurs at this income level. When an individual's income exceeds £100,000, their personal allowance begins to decrease progressively by £1 for every £2 of income above this threshold, ultimately being completely phased out at an income of £125,140. By making contributions to certain approved pension schemes or charitable donations, taxpayers can effectively lower their adjusted net income, which can restore some or all of their personal allowance. This strategy helps maintain tax efficiency, allowing them to take full advantage of the available tax reliefs and allowances. Other strategies might not yield the same benefits in this specific income bracket. For instance, increasing savings may not directly reduce taxable income in a way that counters the effect of the clawback of personal allowance, and investing in property typically involves different types of tax considerations that may not address the immediate issue of personal allowances. Additionally, increasing taxpayer status generally does not provide direct financial benefits in this context, as taxpayer classification can be influenced by factors unrelated to income levels or contributions. Thus, making contributions focused on reducing adjusted net income stands