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Means tests deduct the year's Income Tax liability, not the tax deducted from earnings (HB/IS reg 36(3), UC reg 55(5)) #2108
Means tests deduct Income Tax from earnings, and the law says which tax: the tax actually deducted from, or paid on, the earnings in the period. The model deducts the person's Income Tax liability for the whole year instead. So any relief given only through self assessment, after the year, lowers the tax the means tests deduct, raises the earnings they count, and lowers the benefit. In law it does neither: the relief arrives later as a repayment, which IS and HB treat as capital.
Scheme
What is deducted
UC
"any amounts paid by the person in that period in respect of the employment by way of income tax or primary Class 1 contributions" (reg 55(5)(b)); for self-employment, "any payment made by the person to HMRC in the assessment period by way of national insurance contributions or income tax" (reg 57(2) Step 3)
HB
"any amount deducted from those earnings by way of— (i) income tax" (reg 36(3)(a)); self-employed: a notional amount on chargeable income (reg 38(3)(b), reg 39)
IS
"any amount deducted from those earnings by way of— (i) income tax" (reg 36(3)(a))
Refunds
"any amount by way of a refund of income tax deducted from profits or emoluments ... shall be treated as capital" (IS reg 48(2); HB reg 46(2))
Reliefs the model deducts in income_tax that, in whole or part, reach the taxpayer only through self assessment or a later repayment:
Gift Aid, which allowances deducts as a whole (the donor's relief beyond the basic rate is given through self assessment);
pension_contributions_relief, which allowances deducts without telling net pay arrangements (relieved through PAYE) from relief at source or on a claim (FA 2004 ss.192, 194; relief above the basic rate only through self assessment).
On the enhanced FRS (PolicyEngine/policyengine-uk-data#528's build, 2025-26 to 2030-31) the trade loss relief in #2085 changes no means-tested benefit: £0 a year. No benefit unit's means-tested award moves in any year. The gap still matters for household calculations, e.g. a UC claimant with pay and a loss from a side trade, and for the Gift Aid and pension relief paths, which this issue has not measured.
Fix sketch
Give the means tests the tax deducted in the year: Income Tax computed without the reliefs that are only given through self assessment. #1949 (UC's own tax on earnings) and #1995 (legacy means tests' tax on non-capital income) are reshaping what each means test deducts, so the fix belongs on top of them. It needs a second Income Tax calculation without those reliefs, through a core branch or a parallel set of variables. That costs runtime, so measure it on the enhanced FRS.
Problem
Means tests deduct Income Tax from earnings, and the law says which tax: the tax actually deducted from, or paid on, the earnings in the period. The model deducts the person's Income Tax liability for the whole year instead. So any relief given only through self assessment, after the year, lowers the tax the means tests deduct, raises the earnings they count, and lowers the benefit. In law it does neither: the relief arrives later as a repayment, which IS and HB treat as capital.
Reliefs the model deducts in
income_taxthat, in whole or part, reach the taxpayer only through self assessment or a later repayment:trade_loss_relief_against_general_income);allowancesdeducts as a whole (the donor's relief beyond the basic rate is given through self assessment);pension_contributions_relief, whichallowancesdeducts without telling net pay arrangements (relieved through PAYE) from relief at source or on a claim (FA 2004 ss.192, 194; relief above the basic rate only through self assessment).Size (trade loss relief, from #2085's runs)
On the enhanced FRS (PolicyEngine/policyengine-uk-data#528's build, 2025-26 to 2030-31) the trade loss relief in #2085 changes no means-tested benefit: £0 a year. No benefit unit's means-tested award moves in any year. The gap still matters for household calculations, e.g. a UC claimant with pay and a loss from a side trade, and for the Gift Aid and pension relief paths, which this issue has not measured.
Fix sketch
Give the means tests the tax deducted in the year: Income Tax computed without the reliefs that are only given through self assessment. #1949 (UC's own tax on earnings) and #1995 (legacy means tests' tax on non-capital income) are reshaping what each means test deducts, so the fix belongs on top of them. It needs a second Income Tax calculation without those reliefs, through a core branch or a parallel set of variables. That costs runtime, so measure it on the enhanced FRS.
Found while building #2085 (trading losses).
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