ACCA Advanced Taxation (ATX) Practice Exam

What is the basis for tax relief on pension contributions paid by an individual?

1. Gross income level

2. Gross contributions paid or the maximum annual amount

3. Net income only

4. Taxable benefits received

The correct answer is: Gross contributions paid or the maximum annual amount

Tax relief on pension contributions made by an individual is primarily based on the gross contributions paid or the maximum annual amount allowed, which reflects the individual's contributions before any tax deductions. When an individual contributes to a pension scheme, they can usually claim tax relief on the full amount of those contributions up to a certain limit, which is often set annually by the tax authorities. This approach ensures that individuals are incentivized to save for retirement by allowing them to receive tax relief on the total contributions they actually make, thus effectively reducing their taxable income for the year. The relief is designed to encourage savings in pension schemes by adjusting the tax calculation based on the amount paid into these schemes. It’s also significant to note that there are annual limits to how much an individual can contribute while still benefiting from tax relief, thereby establishing the framework for the maximum allowable contributions. Other options do not accurately capture how pension contribution relief is structured. For example, gross income level, net income, and taxable benefits received do not directly relate to the amount of tax relief available for pension contributions, as relief is specifically contingent on the contributions made rather than individual income types or benefits.