diff --git a/changelog.d/672-stbm-pension-comparison-corrections.changed.md b/changelog.d/672-stbm-pension-comparison-corrections.changed.md new file mode 100644 index 0000000000..8e9f317d54 --- /dev/null +++ b/changelog.d/672-stbm-pension-comparison-corrections.changed.md @@ -0,0 +1 @@ +Corrected the STBM pension comparison page (`docs/book/programs/gov/hmrc/pensions-comparison-stbm.md`): STBM raises the basic-rate limit and every limit above it for non-savings income, and every savings and dividend limit, rather than widening every band, its basic amount is £10,000 in its 2023-24 to 2026-27 systems, Microcosm UK imputes employer contributions from the same ONS ASHE table (P10) as STBM, PolicyEngine UK now estimates carry-forward of unused annual allowance from 2020-21, the threshold income test has been £200,000 since 2020-21, and salary sacrifice under arrangements made before 9 July 2015 can be supplied. diff --git a/docs/book/programs/gov/hmrc/pensions-comparison-stbm.md b/docs/book/programs/gov/hmrc/pensions-comparison-stbm.md index 67ce942385..3eddd435fa 100644 --- a/docs/book/programs/gov/hmrc/pensions-comparison-stbm.md +++ b/docs/book/programs/gov/hmrc/pensions-comparison-stbm.md @@ -20,23 +20,36 @@ more detail on the PolicyEngine side. | | PolicyEngine UK | STBM | |---|---|---| -| How relief is given | Reduces taxable income by the contribution (`pension_contributions_relief`) | Treats contributions as paid net of basic rate: grosses them up by 1/(1 − basic rate) and widens every rate band above the starting band by the gross amount, as under relief at source | +| How relief is given | Reduces taxable income by the contribution (`pension_contributions_relief`) | Treats contributions as paid net of basic rate: grosses them up by 1/(1 − basic rate) and raises the basic-rate limit and every rate limit above it by the gross amount, as under relief at source. For savings and dividend income it raises every limit, including the starting-rate limit for savings and the top of the 0% dividend band (the dividend allowance), neither of which relief at source raises | | Contributions that get relief | The person's own contributions | Employee contributions, additional voluntary contributions **and employer contributions** | | Basic-rate relief added to the pot | Not shown separately | Recorded separately (`pension_relief_at_source`) | -| Earnings limit | Relief capped at relevant UK earnings: employment income, employer-paid Statutory Sick Pay and Statutory Maternity Pay, and self-employment profit | No earnings cap; £3,600 limit when total income is below it | +| Earnings limit | Relief capped at relevant UK earnings (employment income, employer-paid Statutory Sick Pay and Statutory Maternity Pay, and self-employment profit), or £3,600 for relief-at-source contributions if earnings are lower | No earnings cap; when total income is below a basic-amount parameter the limit is that amount (£10,000 in its 2023-24 to 2026-27 systems, £3,600 before) | | Annual allowance | £60,000 (`pension_annual_allowance`), tapered only when adjusted income is above £260,000 and threshold income is above £200,000, as in FA 2004 s. 228ZA | Tapered on total income above a threshold-income parameter | | Contributions above the allowance | Annual allowance charge on the excess, taxed as the top slice of income (`personal_pension_contributions_tax`) | Relief stops at the allowance; no separate charge | -| Employer contributions in the data | Read from the data (`employer_pension_contributions`) | Imputed when missing from the FRS, using the ONS ASHE employer-contribution bands (`src/Pensions.jl`) | -| Carry-forward of unused allowance | Input `unused_pension_annual_allowance` (FA 2004 s. 228A) adds to the allowance; defaults to nil, as the survey data has no past pension input amounts | Not modelled | +| Employer contributions in the data | An input (`employer_pension_contributions`). Microcosm UK draws it from the ONS ASHE employer-contribution bands (Table P10); the Enhanced FRS sets it to three times employee contributions for survey respondents and imputes it with a quantile regression forest on the high-income records whose incomes it imputes from the SPI | Imputed when missing from the FRS, using the ONS ASHE employer-contribution bands (`src/Pensions.jl`) | +| Carry-forward of unused allowance | `unused_pension_annual_allowance` (FA 2004 s. 228A) adds to the allowance. As the survey data has no past pension input amounts, from 2020-21 the default estimates it from an assumed five-year history (this year's input and taper incomes deflated by average earnings growth); before 2020-21 it is nil | Not modelled | + +The STBM column describes its Scottish systems, its default. In its +rest-of-UK systems from 2023-24, `non_savings_basic_rate` points at the 40% +rate (`params/sys_2023_24_ruk.jl` onwards), so there the gross-up uses 40% +and, for non-savings income, only the higher rate limit (£125,140, where the +additional rate starts) rises, not the basic-rate limit. In every system all +savings and dividend limits rise. ## Where the two models differ ### 1. Reducing taxable income versus widening the bands -For an income-tax payer whose contribution stays inside one band, the two -methods give the same total relief. They can differ when the person pays -little or no income tax: STBM still records the basic-rate addition to the -pot, which PolicyEngine UK does not show. +In STBM's Scottish systems, for an income-tax payer with only non-savings +income whose contribution stays inside one band above the Scottish starter +rate, the two methods give the same total relief. They can differ when the +person pays little or no income tax: STBM still records the basic-rate +addition to the pot, which PolicyEngine UK does not show. They also differ +when dividends exceed the dividend allowance, because STBM widens the 0% +dividend band by the gross contribution and PolicyEngine UK does not. +Savings income in the starting-rate band does not make them differ: that +band shrinks as taxable non-savings income rises, so PolicyEngine UK's +deduction frees as much of it as STBM's higher starting-rate limit. **The personal allowance taper.** In law, gross pension contributions reduce adjusted net income @@ -61,7 +74,7 @@ employee's bands further than the law does. The legal taper ([FA 2004 s. 228ZA](https://www.legislation.gov.uk/ukpga/2004/12/section/228ZA)) uses "adjusted income", which adds employer contributions, and applies only -when "threshold income" is also above £200,000 (from 2023-24). +when "threshold income" is also above £200,000 (from 2020-21). - PolicyEngine UK applies both tests (`pension_annual_allowance_adjusted_income` and @@ -70,8 +83,9 @@ when "threshold income" is also above £200,000 (from 2023-24). income of £300,000 but threshold income of £200,000, so keeps the full £60,000 allowance. Its limits: by default the pension input amount is cash contributions, so defined-benefit accrual is counted only if supplied - as an input, and all salary sacrifice is treated as made on or after - 9 July 2015. + as an input, and salary sacrifice is treated as made on or after + 9 July 2015 unless `pension_contributions_via_salary_sacrifice_pre_2015` is + supplied. - STBM tapers on total income above a threshold parameter. Both affect only very high earners. @@ -80,7 +94,11 @@ PolicyEngine UK does not model the money purchase annual allowance, the £10,000 limit on money purchase savings after pensions are first flexibly accessed ([FA 2004 s. 227ZA](https://www.legislation.gov.uk/ukpga/2004/12/section/227ZA)). -It always uses the default chargeable amount. +Its annual allowance charge is always on the default chargeable amount, +the pension input amount above the annual allowance (s. 227ZA(3)), never the +alternative chargeable amount (s. 227B), which replaces it when the money +purchase annual allowance is exceeded and the alternative amount is the +larger (s. 227ZA(1)). ### 4. Lifetime and lump sum allowances @@ -92,8 +110,9 @@ are drawn, not to contributions. ## What neither model does - Working out carry-forward of unused annual allowance from the previous - three years. PolicyEngine UK accepts the result as an input but does not - derive it from past years. + three years' actual pension input. PolicyEngine UK accepts it as an input + and otherwise estimates it from an assumed history, not from recorded past + years. - Behavioural responses: contributions are held fixed when tax rates change. - Decumulation: crystallisation, the tax-free lump sum, and annuity versus drawdown choices.