ACCA Advanced Taxation (ATX) Practice Exam

Who primarily finds ISAs attractive as an investment vehicle?

1. Individuals seeking high risk investments.

2. Higher-rate taxpayers who benefit from dividend tax relief.

3. Individuals with dividend income exceeding £1,000.

4. Individuals without any existing taxable income.

The correct answer is: Individuals with dividend income exceeding £1,000.

Individuals with dividend income exceeding £1,000 find ISAs (Individual Savings Accounts) particularly attractive as an investment vehicle because ISAs offer tax advantages that can significantly benefit their financial situation. In the UK, dividends are generally subject to taxation if they exceed the tax-free dividend allowance, which currently stands at £1,000. Those with dividend income above this threshold can be liable to pay tax on the excess, which varies depending on their overall income level, effectively reducing their net returns from investments. By investing in ISAs, individuals can shield their dividend income from taxation, maximizing their investment returns. This makes ISAs a strategic choice for those who anticipate their dividend income will surpass the £1,000 limit. The other choices do not align as closely with the key characteristics of ISAs. For instance, individuals seeking high-risk investments might pursue different avenues that do not necessarily offer the tax benefits of an ISA. Higher-rate taxpayers may benefit from dividend tax relief, but the specific link to ISAs is less direct; they might find that the tax benefits of ISAs are not as pronounced compared to other investment strategies. Finally, individuals without any existing taxable income may also benefit from ISAs, but their need for tax sheltering of investments becomes less