ACCA Advanced Taxation (ATX) Practice Exam

What is the formula for calculating threshold income?

1. Gross income plus allowable deductions

2. Net income plus gross personal pension contributions

3. Net income less gross personal pension contributions

4. Net income minus tax credits

The correct answer is: Net income less gross personal pension contributions

Threshold income is defined by the amount used to determine an individual's eligibility for certain tax reliefs and allowances, such as the high income child benefit charge or the personal allowance restriction. To compute threshold income, one starts with net income and then adjusts it by considering personal pension contributions. The correct formula involves taking the net income and adding back any gross personal pension contributions. This is because gross personal pension contributions reduce taxable income but must be added back to assess threshold income, ensuring that the total reflects the individual's capacity for benefits or reliefs effectively. In this calculation, tax credits are not considered as they don't affect the measure of threshold income but rather impact the final tax liability. Allowable deductions would already be accounted for when determining net income, and gross income is the figure before any deductions are applied and therefore isn't appropriate for this specific calculation of threshold income.