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ACCA Applied Skills · Taxation (UK) · The overall function and purpose of taxation in a modern economy

The UK tax system allows an individual to invest up to £20,000 in total in an individual savings account (ISA) each tax year with the returns being exempt from tax. Which characteristic of the tax system is MOST directly demonstrated by this rule?

The ISA exemption with a £20,000 overall limit is an incentive designed to change behaviour by encouraging saving. This reflects the use of tax as a tool of social and economic policy, not economy of collection, retrospection or a proportional rate structure.

  1. AUsing tax to influence behaviour, by encouraging savingCorrect
  2. BEconomy in collection of the tax
  3. CRetrospective legislation to prevent avoidance
  4. DCharging a proportional rate of tax on all savings income

Explanation

The ISA exemption, subject to the £20,000 overall investment limit, is an incentive that uses tax to encourage saving, which is a social and economic function of taxation. It is not about collection cost, retrospective law or proportional rates.

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