ACCA Advanced Taxation (ATX) Practice Exam

What is the correct formula for calculating post-tax income?

1. Total cash income plus total tax

2. Total cash income minus total tax

3. Total cash income divided by total tax

4. Total cash income times total tax

The correct answer is: Total cash income minus total tax

Post-tax income is calculated by taking the total cash income and subtracting the total tax owed. This formula reflects the actual income an individual or entity retains after fulfilling their tax obligations. It is a straightforward calculation that provides insight into the net income available for spending or saving once taxes have been accounted for. When we consider total cash income, it represents the gross earnings before taxes are applied. The total tax, on the other hand, is the amount owed to tax authorities based on applicable rates and regulations. By subtracting the total tax from total cash income, we arrive at the income available for the individual or business after taxes. This is crucial for personal budgeting, financial planning, and assessing overall financial health. Other methods presented in the choices don’t accurately reflect the relationship between income and tax. Adding total tax to cash income would imply you are increasing your net earnings, which is not reflective of post-tax earnings. Dividing or multiplying cash income by total tax presents a misinterpretation of the relationship—there is no standard financial concept that equates income directly with these operations in the context of tax calculations. Thus, the correct approach to determine post-tax income is indeed to subtract total tax from total cash income.