ACCA Advanced Taxation (ATX) Practice Exam

What is the restriction on the annual allowance for high-income individuals?

1. It remains the same regardless of income

2. Reduced if adjusted income exceeds £240,000

3. No reduction if income is below £200,000

4. Cannot exceed £10,000

The correct answer is: Reduced if adjusted income exceeds £240,000

The restriction on the annual allowance for high-income individuals is indeed related to their adjusted income surpassing a specific threshold. When an individual's adjusted income exceeds £240,000, their annual allowance starts to reduce. This reduction occurs on a sliding scale, which means that the higher the adjusted income, the less annual allowance the individual is eligible for, potentially down to a minimum allowance of £4,000 when adjusted income reaches £312,000 or higher. This system is designed to limit the tax advantages of pension contributions for higher earners, maintaining some level of equity in the taxation environment. The other options do not accurately reflect the mechanics of how the annual allowance restriction is applied or suggest incorrect stability regarding income levels and annual allowance, which doesn't account for the complexities of individual taxation based on earnings. Thus, option B accurately describes the reduction mechanism for high-income individuals.