ACCA Advanced Taxation (ATX) Practice Exam

When is it advantageous to offset the Personal Allowance (PA) in a different order?

1. Always offset against salary income first

2. Offset against capital gains first

3. Offset against dividend income to maximize relief

4. Offset against rental income first

The correct answer is: Offset against dividend income to maximize relief

Offsetting the Personal Allowance against dividend income to maximize relief is advantageous because dividend income is subject to a tax treatment that can result in a higher effective tax rate compared to other types of income. Specifically, individuals may enjoy a tax-free dividend allowance for a certain threshold of dividend income. By applying the Personal Allowance to dividend income first, a taxpayer can reduce their taxable income from dividends more effectively, ensuring they fully utilize the tax-free allowance before resorting to other income types. This strategy can lead to a lower overall tax liability, maximizing the relief available from the Personal Allowance. In contrast, salary income and rental income may not provide the same opportunities for maximizing relief since these types of income do not have the same favorable treatments and allowances as dividends. By not prioritizing dividends, taxpayers may miss out on valuable tax savings, making it crucial to consider the order of offsetting Personal Allowance in relation to the different sources of income.