ACCA Advanced Taxation (ATX) Practice Exam

What is the tax rate applied to pension income after the tax-free lump sum has been taken from the fund?

1. 10%/20%/30%

2. 20%/40%/45%

3. 25%/35%/45%

4. 30%/40%/50%

The correct answer is: 20%/40%/45%

The tax rate applied to pension income after the tax-free lump sum has been taken from the fund is based on the individual's income tax band. In the UK, once an individual exceeds their personal allowance or when income is derived from their pension, it is taxed according to the progressive tax rates that apply to their annual income. The relevant tax bands typically include rates of 20%, 40%, and 45%. The basic rate of 20% applies to income up to a certain threshold, the higher rate of 40% applies to income exceeding that threshold up to a higher limit, and 45% applies to income exceeding the highest threshold. Taking a lump sum out of a pension fund usually means that the remaining income (i.e., the pension payments) will be subject to these income tax rates. The tax-free lump sum typically allows for a portion of the pension to be accessed without incurring any income tax, and any payments taken after this lump sum is where the individual must pay income tax at the prevailing rates. Thus, the choice that reflects these rates—specifically, the 20%, 40%, and 45% tax rates—correctly aligns with the structure of income taxation applicable to pensions.