ACCA Advanced Taxation (ATX) Practice Exam

What happens to the Personal Allowance at incomes exceeding £125,140?

1. The allowance is halved

2. The allowance is fully retained

3. The allowance is completely removed

4. The allowance is restricted by 50%

The correct answer is: The allowance is completely removed

When an individual's income exceeds £125,140, the Personal Allowance is completely removed. This means that taxpayers with income above this threshold are not entitled to any Personal Allowance, which is a portion of an individual's income that is not subject to income tax. The rationale behind this policy is to ensure that as individuals earn more, they gradually lose the benefit of tax-free income, effectively increasing their tax liability beyond this income level. For income in the range just over £100,000 up to £125,140, the Personal Allowance is reduced by £1 for every £2 of income above £100,000. Therefore, at an income level of £125,140 and beyond, the allowance diminishes to zero, resulting in full removal. This policy is designed to ensure that higher earners contribute more towards income tax as their income increases.