ACCA Taxation (F6) Practice Exam

What is included in the calculation of adjusted income for pensions?

1. Net income alone

2. Net income plus employer contributions

3. Net income plus employee contributions

4. Net income plus both employee and employer contributions

The correct answer is: Net income plus both employee and employer contributions

Adjusted income for pensions is a crucial term used in the context of determining how much can be contributed to a pension scheme without incurring tax penalties. The calculation of adjusted income includes net income along with both employee and employer contributions to pension schemes. Net income represents the individual's total earnings after tax, but to accurately ascertain adjusted income for pension purposes, it's essential to include all contributions made towards pension plans. By incorporating both employer and employee contributions, this calculation reflects the total resources that can potentially impact the pension savings available and any associated tax reliefs. Employer contributions are particularly significant as they are often substantial and can influence the overall pension inputs. Similarly, employee contributions indicate the dedication of the individual towards retirement planning and also have implications for tax relief. Thus, adjusting income by summing both types of contributions provides a comprehensive picture of the individual's commitment to their pension savings and helps in assessing the pension contribution limits effectively. This is why the option that incorporates both employee and employer contributions, along with net income, is the correct choice for calculating adjusted income for pensions.