ACCA Taxation (F6) Practice Exam

What is the impact of higher rate relief on personal pensions?

1. Restrictions apply to higher rate taxpayers

2. It automatically qualifies all taxpayers for relief

3. It extends the basic rate band by the gross rate of contribution

4. It is not available to employees

The correct answer is: It extends the basic rate band by the gross rate of contribution

Higher rate relief on personal pensions is an important aspect of personal tax planning, particularly for individuals who contribute to pension schemes. The correct answer points to the extension of the basic rate band by the gross rate of contribution. When a higher rate taxpayer makes a contribution to a personal pension scheme, the contribution is eligible for tax relief at the individual's marginal tax rate. This means that not only does the taxpayer receive relief on their contributions, but the amount that qualifies for tax relief is also grossed up. For instance, if a higher rate taxpayer contributes a net amount, tax relief is added, effectively increasing their basic rate band. This extension of the basic rate band allows them to earn income within that band before they start being taxed at the higher rate on additional income. This aspect of tax relief for pensions encourages savings for retirement, as it allows individuals to contribute more to their pensions while still benefiting from a lower effective tax rate on their earnings up to the newly extended band limit. In contrast, the other options present different implications regarding higher rate relief. The idea of restrictions applying to higher rate taxpayers does not capture the benefit of the extended basic rate band, while indicating that all taxpayers automatically qualify for relief misrepresents the conditions under which relief is granted.