ACCA Taxation (F6) Practice Exam

What is the maximum tax relievable contribution in a tax year?

1. The lower of gross contribution or earnings

2. The higher of gross contribution or £5,000

3. Flat rate of £40,000

4. Fixed amount of £3,600 for all individuals

The correct answer is: The lower of gross contribution or earnings

The correct choice highlights an important principle in tax relief for pension contributions, which allows individuals to receive tax relief on their contributions based on their earnings. Specifically, the maximum tax relievable contribution in a tax year is indeed limited to the lower of the gross contribution made or the individual’s relevant earnings. This rule ensures that individuals cannot claim tax relief on contributions that exceed their income, aligning tax benefits with actual earnings. For those who have no earnings or whose pension contributions exceed their earnings, the tax relief would be adjusted accordingly, reflecting a fair and equitable approach. In contrast, the other options do not accurately represent the criteria for tax relief limits. The reference to a fixed figure such as £5,000 or flat rate of £40,000 does not account for an individual's earnings, which is central to understanding the relief eligibility. A flat fixed amount of £3,600 also does not consider the varying financial circumstances of different taxpayers and is primarily applicable in cases where an individual has little to no relevant income. Overall, the emphasis on connecting tax relief directly to earnings ensures a fair application of tax benefits.