ACCA Taxation (F6) Practice Exam

How does tax relief work for personal pension contributions?

1. Payments are deemed to be gross of basic rate income tax

2. Payments are deemed to be net of basic rate income tax

3. Only basic rate taxpayers can receive tax relief

4. Higher rate relief is not available

The correct answer is: Payments are deemed to be net of basic rate income tax

Tax relief for personal pension contributions operates under a system designed to incentivize savings for retirement. When individuals contribute to a personal pension, these contributions are made net of basic rate income tax. This means that the tax relief is effectively granted at the point of contribution. For someone making a personal pension contribution, if they contribute a certain amount, the pension scheme will claim back the basic rate tax from HM Revenue and Customs (HMRC) on that contribution. For instance, if an individual contributes £80 to their pension, the provider claims an additional £20 from HMRC, making the total contribution to the pension scheme £100. Thus, the payment reflects the net amount after accounting for basic rate tax relief. This structure encourages more contributions towards pensions, as individuals feel they are receiving a form of “bonus” from the government through the tax relief process. It is important to note that this tax relief mechanism applies to all taxpayers, not just basic rate taxpayers, as higher and additional rate taxpayers can claim additional relief through their self-assessment tax returns, making option B entirely valid. Other options do not adequately capture the framework of tax relief for pension contributions, as they either restrict relief to basic rate taxpayers or inaccurately describe how contributions are treated regarding tax