ACCA Advanced Taxation (ATX) Practice Exam

What is the effective rate of tax on income ranging from £100,000 to £125,140?

1. 40%

2. 60%

3. 45%

4. 20%

The correct answer is: 60%

To determine the effective rate of tax on income ranging from £100,000 to £125,140, it is essential to understand how the UK's income tax brackets function, particularly regarding the withdrawal of personal allowance and the marginal tax rates applied. In the UK, individuals are entitled to a personal allowance, which is gradually reduced for income above £100,000. For every £2 of income above this threshold, the personal allowance is reduced by £1. Thus, someone earning £100,000 has the full personal allowance, but as they earn more, this allowance diminishes, essentially leading to a situation where the effective tax rate increases. When income reaches £125,140, the personal allowance is completely withdrawn. The income tax brackets above £100,000 include: - The basic rate of 20% applies on income up to £50,270 (on income between £12,571 and £50,270). - The higher rate of 40% applies on income above £50,270 up to £150,000. - For income exceeding £100,000, as noted, the effective tax impact becomes substantial due to the withdrawal of the personal allowance. Calculating the effective tax rate from £100,000 to £125,