ACCA Advanced Taxation (ATX) Practice Exam

What happens to the personal allowance when adjusted net income is reduced below the threshold after loss relief?

1. It is irrelevant in tax calculations

2. It remains unchanged

3. It is fully restored

4. It is partially restored

The correct answer is: It is fully restored

When an individual's adjusted net income is reduced below the personal allowance threshold due to loss relief, the personal allowance is fully restored. This occurs because the personal allowance is available to all individuals whose income falls below a specific level. In the context of loss relief, if eligible losses are utilized and the resulting adjusted net income drops below the threshold, the individual becomes entitled to the full amount of the personal allowance as if they had no income above the threshold. Thus, they can benefit from the tax relief associated with the entire allowance, effectively reducing their taxable income significantly. In circumstances where the adjusted net income exceeds the threshold, the personal allowance is subject to a tapering mechanism; however, once it's reduced below the threshold due to losses, individuals regain access to the full allowance. This principle emphasizes the role of income reduction strategies in maximizing tax efficiency through available relief measures.