ACCA Advanced Taxation (ATX) Practice Exam

Which two amounts must be considered for the reduction of the annual allowance for pensions?

1. Threshold income and adjusted income

2. Net income and gross income

3. Taxable income and non-taxable income

4. Basic income and maximum income

The correct answer is: Threshold income and adjusted income

The correct answer involves the concept of "threshold income" and "adjusted income," which are essential for determining the reduction of the annual allowance for pensions. When analyzing annual allowances for pensions, the adjustment is based on these two types of income. Threshold income is an important measure as it helps establish whether an individual exceeds specific limits that could trigger a reduction in their annual pension allowance. Adjusted income takes into account not only the income earned but also any contributions to pensions that affect the annual allowance. If an individual's adjusted income surpasses a defined limit (currently set at £240,000 for high earners), then their annual allowance could be curtailed. These income types ensure that taxation policy effectively targets higher earners while maintaining a fair system that encourages retirement savings. Thus, both threshold and adjusted incomes are crucial in assessing the amount by which an individual's annual allowance for pension contributions will be reduced, aligning with the overall goal of the tax regulations in managing pension contributions relative to income levels.