ACCA Advanced Taxation (ATX) Practice Exam

Which types of income are classified as relevant earnings for pension contributions?

1. Only employment income

2. Employment income, trading income, and foreign income

3. Employment income, trading income, and FHA

4. All types of income

The correct answer is: Employment income, trading income, and FHA

The correct response identifies that relevant earnings for pension contributions include employment income, trading income, and foreign holiday allowances (FHA). This classification is critical because when determining the amount that can be contributed to a pension scheme, only specific types of income are considered as relevant earnings. Employment income encompasses salaries and wages received from employment. Trading income relates to profits gained from self-employment or business activities. Foreign holiday allowances may also be included as they can form part of an individual’s earnings, provided they meet the necessary criteria set by tax regulations. This categorization is essential because pension contribution limits are based on the individual’s relevant earnings, which ultimately affects how much tax relief they may receive on contributions. Recognizing which types of income qualify helps individuals maximize their pension contributions and any associated tax benefits effectively. In contrast, other types of income, such as passive income from investments or property, do not qualify as relevant earnings for the purpose of pension contributions. Thus, the answer encompasses only those types of income that directly influence pension contribution limits and benefit from tax allowances.