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ACCA Applied Skills · Taxation (UK) · The use of exemptions and reliefs in deferring and minimising income tax liabilities

Priya, a higher rate taxpayer, has taxable non-savings income of £70,000 in 2025–26 and makes a personal pension contribution of £16,000 net to a relief at source scheme. She has no other reliefs or gains. By how much will her basic rate band be extended, and what additional relief can she claim through her tax return?

The basic rate band is extended by the gross contribution of £20,000 (£16,000 × 100/80). Higher rate relief is claimed on the gross amount at an extra 20%, giving £4,000 additional relief, because basic rate relief was already given at source.

  1. ABand extended by £20,000; additional tax relief of £4,000Correct
  2. BBand extended by £16,000; additional tax relief of £3,200
  3. CBand extended by £20,000; additional tax relief of £8,000
  4. DBand extended by £16,000; additional tax relief of £6,400

Explanation

The net payment of £16,000 is grossed up by 100/80 to £20,000. The basic rate band is extended by the gross amount of £20,000. Higher rate relief is the gross amount taxed at the difference between 40% and 20%: £20,000 × 20% = £4,000. Using the net figure of £16,000 understates the band extension.

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