ACCA Taxation (F6) Practice Exam

At what rate is the annual allowance charge taxed?

1. Flat rate of 10%

2. Flat rate of 20%

3. An individual's marginal rate of tax

4. Standard rate of 15%

The correct answer is: An individual's marginal rate of tax

The correct response indicates that the annual allowance charge is taxed at an individual's marginal rate of tax. This is because the annual allowance charge represents a tax charge that is connected to an individual's earnings and overall taxable income, which means it falls into the portion of the tax system where taxpayers are taxed according to their personal income tax band. Each individual has a unique marginal tax rate, reflecting their level of income and the respective thresholds set by the tax laws. For instance, as an individual's taxable income rises, they may find themselves in a higher tax band, which in turn affects the rate at which their annual allowance charge is taxed. In contrast, the other options suggest a fixed rate of tax—10%, 20%, or 15%—which do not accurately represent the progressive nature of personal taxation, where higher earnings are taxed at higher rates. Therefore, choosing the marginal rate aligns with the broader principles of income taxation, emphasizing the personalized approach to tax liability based on an individual's earnings.