ACCA Taxation (F6) Practice Exam

How can tax relief be provided for personal pensions?

1. Only through income tax deductions

2. Through net pay arrangements

3. At source via tax return

4. By employer contributions only

The correct answer is: At source via tax return

The provision of tax relief for personal pensions can take multiple forms, but it is essential to understand how relief is typically granted. When considering the correct answer, the method of providing tax relief at source via tax return is crucial because this approach enables individuals to receive immediate tax benefits when they make contributions to their pension plans. In practical terms, when contributions are made into a personal pension scheme, the amount contributed is effectively enhanced by the basic rate of tax through a process known as "relief at source." This means that the pension provider adds the basic rate tax relief (currently 20%) to the contributions made. For example, if an individual pays £80 into their pension, the pension scheme receives £100, automatically including the tax relief. It is this mechanism that allows immediate benefit to the contributor without the need for them to adjust their tax return, as the pension scheme handles the process. Tax relief at the source simplifies transactions and encourages savings into pension plans since contributors do not have to wait until they complete their tax returns to receive the benefits. Other forms of tax relief may exist, but they do not provide the same immediacy. Hence, while net pay arrangements allow contributions to be made from an employee's salary before tax is applied, these