ACCA Advanced Taxation (ATX) Practice Exam

What consequence does an individual's pension fund exceeding the lifetime allowance have?

1. The excess is taxed at 25%

2. The excess is taxed at the individual's income tax rate

3. A 55% tax charge applies to the excess

4. No tax applies to the excess

The correct answer is: A 55% tax charge applies to the excess

When an individual's pension fund exceeds the lifetime allowance, a tax charge applies to the excess amount. Specifically, if the excess amount is taken as a lump sum, it is taxed at a rate of 55%. This is intended to discourage individuals from exceeding the set limits for pension savings, which are meant to promote fairness and sustainability in the pension system. The lifetime allowance is a limit on the amount of pension benefits that can be built up without incurring additional tax charges. If the value of an individual's total pension benefits exceeds this allowance, the excess amount is subject to a tax charge designed to penalize the excess savings, reflecting the government's intentions regarding pension contributions. The options referring to a 25% tax or taxation at the individual's income tax rate relate to different scenarios involving pension benefits, but they do not apply specifically to the exceedance of the lifetime allowance. The option stating that no tax applies fails to acknowledge the established penalties for exceeding the allowance. Thus, the appropriate consequence for exceeding the lifetime allowance is indeed the imposition of a 55% tax charge on the excess amount.