ACCA Advanced Taxation (ATX) Practice Exam

What percentage of the previous year's income tax payable is used for payments on account?

1. 25%

2. 50%

3. 75%

4. 100%

The correct answer is: 50%

Payments on account for income tax are designed to help taxpayers manage their tax liabilities by spreading the payment across the year. Specifically, for most taxpayers in the UK, the amount used for payments on account is based on the previous year's tax liability. This setup helps ensure that taxpayers are making sufficient contributions towards their taxable income for the current year, thereby reducing the risk of underpayment. The percentage established for payments on account is set at 50% of the previous year's income tax payable. This means that if the income tax liability for the previous year was £2,000, the payments on account would be calculated as two payments of £1,000 each, which corresponds to 50% of the prior year's tax. This approach effectively creates a balance between helping taxpayers manage cash flow while ensuring that they are paying an appropriate amount towards their annual tax obligations. The other percentages listed do not align with the established payment system, which is explicitly set at 50%. The system aims to ensure that taxpayers can forecast their tax payments based on prior liabilities, thus minimizing surprises when it comes to settling their final tax bill at the end of the year.