ACCA Taxation (F6) Practice Exam

What happens if adjusted income exceeds £240,000 regarding the annual allowance?

1. The annual allowance increases

2. The annual allowance is unaffected

3. The annual allowance is reduced

4. Only basic rate taxpayers are affected

The correct answer is: The annual allowance is reduced

When adjusted income exceeds £240,000, the annual allowance is indeed reduced. The annual allowance is the maximum amount individuals can contribute to their pension schemes and still receive tax benefits. As income increases beyond this threshold, a tapering mechanism comes into play, gradually reducing the annual allowance. Specifically, for every £2 of adjusted income over the £240,000 limit, the annual allowance decreases by £1, down to a minimum annual allowance of £4,000. This adjustment is designed to target higher earners, ensuring that tax relief on pension contributions is limited as income rises, effectively encouraging more equitable tax treatment across different income levels. This rule does not affect the annual allowance by increasing it, leaving it unchanged, or limiting the impact to only basic rate taxpayers, as the taper applies universally to higher earners regardless of their tax bracket. Therefore, the correct choice accurately reflects the impact of high income on pension contributions and tax relief.