diff --git a/changelog.d/2237.fixed.md b/changelog.d/2237.fixed.md new file mode 100644 index 0000000000..bbb0352cef --- /dev/null +++ b/changelog.d/2237.fixed.md @@ -0,0 +1 @@ +Relieve pension contributions up to the annual limit in Finance Act 2004 s. 190 (relevant UK earnings, raised to £3,600 where lower, the increase only through relief at source, s. 191(7)) instead of the annual allowance, and charge the annual allowance charge once on the excess (s. 227), so contributions above the allowance are no longer taxed twice. The charge now taxes the chargeable amount as the top slice of reduced net income at the basic, higher and additional rates (s. 227(4A)), with the rate limits raised by relief-at-source contributions and grossed-up Gift Aid (s. 227(4C)), or at the Scottish rates with the starter band charged at the Scottish basic rate (s. 227(4AA)), rather than at one marginal rate. Add `unused_pension_annual_allowance` for unused allowance carried forward from the three previous years (s. 228A; nil by default) and `pension_annual_allowance_chargeable_amount`. A trading loss no longer reduces relevant earnings from employment. diff --git a/policyengine_uk/tests/policy/baseline/gov/hmrc/pensions/pension_contributions_relief.yaml b/policyengine_uk/tests/policy/baseline/gov/hmrc/pensions/pension_contributions_relief.yaml index dc3dc27731..7ea1ec526f 100644 --- a/policyengine_uk/tests/policy/baseline/gov/hmrc/pensions/pension_contributions_relief.yaml +++ b/policyengine_uk/tests/policy/baseline/gov/hmrc/pensions/pension_contributions_relief.yaml @@ -6,14 +6,20 @@ personal_pension_contributions: 40000 output: pension_contributions_relief: 40000 -- name: Pension relief excessive +- name: Pension relief is not capped at the (tapered) annual allowance period: 2020 - absolute_error_margin: 0 + absolute_error_margin: 0.01 input: employment_income: 2000000 personal_pension_contributions: 400000 output: - pension_contributions_relief: 4000 + # FA 2004 s. 190: relief up to relevant UK earnings, so all 400,000 is + # relieved even though the tapered annual allowance is 4,000. + pension_contributions_relief: 400000 + # The annual allowance charge recovers the relief on the excess: + # (400,000 - 4,000) at 45% on top of reduced net income of 1,600,000. + pension_annual_allowance_chargeable_amount: 396000 + personal_pension_contributions_tax: 396000 * 0.45 - name: £30k self-employment income, no private pension contributions period: 2023 absolute_error_margin: 0.01 @@ -49,3 +55,64 @@ output: pension_contributions_relief: 6_000 income_tax: 11432 - 6000 * 0.4 + +- name: Relief on the basic amount when relevant earnings are lower (s. 190(2)) + period: 2024 + absolute_error_margin: 0.01 + input: + employment_income: 2_000 + personal_pension_contributions: 5_000 + output: + pension_contributions_relief: 3_600 + +- name: A net pay arrangement cannot give the basic-amount increase (s. 191(7)) + period: 2024 + absolute_error_margin: 0.01 + input: + employment_income: 2_000 + employee_pension_contributions_reported: 3_000 + output: + pension_contributions_relief: 2_000 + +- name: Only relief at source fills the basic-amount increase (s. 191(7)) + period: 2024 + absolute_error_margin: 0.01 + input: + employment_income: 2_000 + employee_pension_contributions_reported: 1_500 + personal_pension_contributions: 1_000 + output: + # 2_000 of earnings relieves all 2_500 up to earnings; the increase to + # 3_600 can only come from the 1_000 of relief at source, of which 500 is + # left after earnings: 2_000 + 500. + pension_contributions_relief: 2_500 + +- name: Relief up to relevant earnings, not beyond (s. 190(1)) + period: 2024 + absolute_error_margin: 0.01 + input: + employment_income: 40_000 + self_employment_income: 10_000 + personal_pension_contributions: 70_000 + output: + pension_contributions_relief: 50_000 + +- name: A trading loss does not reduce relevant earnings from employment + period: 2024 + absolute_error_margin: 0.01 + input: + employment_income: 40_000 + self_employment_income: -10_000 + personal_pension_contributions: 45_000 + output: + pension_contributions_relief: 40_000 + +- name: No relief on contributions paid at 75 or over (s. 188(3)(a)) + period: 2024 + absolute_error_margin: 0.01 + input: + age: 75 + employment_income: 40_000 + personal_pension_contributions: 10_000 + output: + pension_contributions_relief: 0 diff --git a/policyengine_uk/tests/policy/baseline/gov/hmrc/pensions/personal_pension_contributions_tax.yaml b/policyengine_uk/tests/policy/baseline/gov/hmrc/pensions/personal_pension_contributions_tax.yaml index efee04245b..3afa8bb08c 100644 --- a/policyengine_uk/tests/policy/baseline/gov/hmrc/pensions/personal_pension_contributions_tax.yaml +++ b/policyengine_uk/tests/policy/baseline/gov/hmrc/pensions/personal_pension_contributions_tax.yaml @@ -28,10 +28,11 @@ employee_pension_contributions_reported: 70_000 output: # Total for AA: 70_000, excess = 70_000 - 60_000 = 10_000 - # pension_contributions_relief = min(100k, 70k) then min(70k, 60k) = 60_000 - # taxed_income = 100_000 - 12_570 - 60_000 = 27_430 - # Marginal rate at 27_430 = 20% (basic rate) + # pension_contributions_relief = 70_000 (within relevant earnings) + # reduced net income = 100_000 - 12_570 - 70_000 = 17_430 + # 17_430 + 10_000 = 27_430 is within the basic rate band # Tax charge: 10_000 * 0.2 = 2_000 + pension_contributions_relief: 70_000 personal_pension_contributions_tax: 2_000 - name: Employer contributions push total over AA @@ -44,8 +45,8 @@ output: # Total for AA: 20_000 + 50_000 = 70_000, excess = 70_000 - 60_000 = 10_000 # pension_contributions_relief = min(100k, 20k) = 20_000 - # taxed_income = 100_000 - 12_570 - 20_000 = 67_430 - # Marginal rate at 67_430 = 40% (higher rate) + # reduced net income = 100_000 - 12_570 - 20_000 = 67_430 + # 67_430 to 77_430 is within the higher rate band # Tax charge: 10_000 * 0.4 = 4_000 personal_pension_contributions_tax: 4_000 @@ -58,7 +59,168 @@ output: # Total for AA: 70_000 (all employer), excess = 70_000 - 60_000 = 10_000 # pension_contributions_relief = 0 (no employee/personal contributions) - # taxed_income = 100_000 - 12_570 = 87_430 - # Marginal rate at 87_430 = 40% (higher rate) + # reduced net income = 100_000 - 12_570 = 87_430 + # 87_430 to 97_430 is within the higher rate band # Tax charge: 10_000 * 0.4 = 4_000 personal_pension_contributions_tax: 4_000 + +# Issue #2237 reproducer: one adult, £150,000 earnings, London, 2024. Before +# the fix, relief stopped at the £60,000 allowance and the charge was also +# levied on the excess, so £80,000 of contributions cost £8,000 more income +# tax than £60,000. Relief now runs to relevant earnings and the charge +# recovers it once, so income tax is the same. +- name: Issue 2237 - contributions at the annual allowance + period: 2024 + absolute_error_margin: 0.01 + input: + age: 45 + employment_income: 150_000 + personal_pension_contributions: 60_000 + region: LONDON + output: + pension_contributions_relief: 60_000 + personal_pension_contributions_tax: 0 + income_tax: 28_460 + +- name: Issue 2237 - contributions £20,000 above the annual allowance + period: 2024 + absolute_error_margin: 0.01 + input: + age: 45 + employment_income: 150_000 + personal_pension_contributions: 80_000 + region: LONDON + output: + pension_contributions_relief: 80_000 + pension_annual_allowance_chargeable_amount: 20_000 + # Reduced net income 150_000 - 80_000 = 70_000; 70_000 to 90_000 is all + # higher rate. + personal_pension_contributions_tax: 8_000 + income_tax: 28_460 + +- name: Charge spans bands as the top slice of reduced net income (s. 227(4A)) + period: 2024 + absolute_error_margin: 0.01 + input: + employment_income: 60_000 + employee_pension_contributions_reported: 60_000 + employer_pension_contributions: 40_000 + output: + # Net pay: relief 60_000 comes off employment income, so reduced net + # income is 60_000 - 60_000 floored at 0 (the personal allowance is + # unused). Chargeable amount 100_000 - 60_000 = 40_000: 37_700 at 20% and + # 2_300 at 40%. + pension_contributions_relief: 60_000 + pension_annual_allowance_chargeable_amount: 40_000 + personal_pension_contributions_tax: 37_700 * 0.2 + 2_300 * 0.4 + +- name: Relief at source raises the rate limits instead (s. 227(4C)) + period: 2024 + absolute_error_margin: 0.01 + input: + employment_income: 60_000 + personal_pension_contributions: 60_000 + employer_pension_contributions: 40_000 + output: + # Relief at source leaves reduced net income at 60_000 - 12_570 = 47_430 + # and raises the basic rate limit by 60_000 to 97_700, so all 40_000 + # falls at 20% (HMRC PTM056120). + personal_pension_contributions_tax: 40_000 * 0.2 + +- name: Gift Aid raises the rate limits by its grossed-up amount (s. 227(4C)) + period: 2025 + absolute_error_margin: 0.01 + input: + employment_income: 60_000 + personal_pension_contributions: 10_000 + employer_pension_contributions: 60_000 + gift_aid: 1_000 + output: + # Reduced net income 60_000 - 12_570 = 47_430. Basic rate limit + # 37_700 + 10_000 + 1_250 (Gift Aid grossed up) = 48_950. Chargeable + # amount 70_000 - 60_000 = 10_000: 1_520 at 20%, 8_480 at 40%. + personal_pension_contributions_tax: 1_520 * 0.2 + 8_480 * 0.4 + +- name: Scottish taxpayer pays Scottish rates on the chargeable amount + period: 2026 + absolute_error_margin: 0.01 + input: + age: 45 + employment_income: 150_000 + personal_pension_contributions: 80_000 + region: SCOTLAND + output: + # Reduced net income 70_000; 70_000 to 90_000 is in the 45% advanced band. + personal_pension_contributions_tax: 20_000 * 0.45 + +- name: Scottish starter band is charged at the Scottish basic rate (s. 227(4AA)) + period: 2026 + absolute_error_margin: 0.01 + input: + age: 45 + employment_income: 100_000 + employee_pension_contributions_reported: 100_000 + region: SCOTLAND + output: + # Net pay: reduced net income 100_000 - 100_000 floored at 0. Chargeable + # amount 40_000: 20% up to the 16_956 basic rate limit (the starter band + # included), 21% to 31_092, then 42%. + personal_pension_contributions_tax: 16_956 * 0.2 + (31_092 - 16_956) * 0.21 + (40_000 - 31_092) * 0.42 + +# A model deviation, documented: the model gives relief at source as a +# deduction, so a Scottish starter-rate slice is relieved at 19%, while relief +# at source pays 20% and the charge on that slice is at the Scottish basic rate +# (s. 227(4AA)). Contributing beyond the allowance therefore costs this taxpayer +# 1% of the 3_967 starter band (£39.67) more income tax. +- name: Scottish relief at source at the annual allowance (model deviation, see comment) + period: 2026 + absolute_error_margin: 0.01 + input: + age: 45 + employment_income: 80_000 + personal_pension_contributions: 60_000 + region: SCOTLAND + output: + # Taxable income 80_000 - 12_570 - 60_000 = 7_430: 3_967 at 19%, 3_463 at 20%. + income_tax: 3_967 * 0.19 + 3_463 * 0.2 + +- name: Scottish relief at source beyond the annual allowance (model deviation, see comment) + period: 2026 + absolute_error_margin: 0.01 + input: + age: 45 + employment_income: 80_000 + personal_pension_contributions: 67_430 + region: SCOTLAND + output: + # No taxable income after relief; the 7_430 chargeable amount sits within + # the raised Scottish basic rate limit, at 20%. + personal_pension_contributions_tax: 7_430 * 0.2 + income_tax: 7_430 * 0.2 + +- name: Unused annual allowance brought forward covers the excess (s. 228A) + period: 2024 + absolute_error_margin: 0.01 + input: + age: 45 + employment_income: 150_000 + personal_pension_contributions: 80_000 + unused_pension_annual_allowance: 20_000 + region: LONDON + output: + pension_annual_allowance_chargeable_amount: 0 + personal_pension_contributions_tax: 0 + income_tax: 28_460 - 8_000 + +- name: Unused annual allowance brought forward covers part of the excess + period: 2024 + absolute_error_margin: 0.01 + input: + age: 45 + employment_income: 150_000 + personal_pension_contributions: 80_000 + unused_pension_annual_allowance: 5_000 + region: LONDON + output: + pension_annual_allowance_chargeable_amount: 15_000 + personal_pension_contributions_tax: 15_000 * 0.4 diff --git a/policyengine_uk/tests/test_pension_annual_allowance_properties.py b/policyengine_uk/tests/test_pension_annual_allowance_properties.py new file mode 100644 index 0000000000..98611839b0 --- /dev/null +++ b/policyengine_uk/tests/test_pension_annual_allowance_properties.py @@ -0,0 +1,346 @@ +"""Property-based tests for pension contributions relief and the annual +allowance charge (issue #2237). + +Relief runs to the annual limit in FA 2004 s. 190 (relevant UK earnings, +raised to the basic amount where lower, the increase only through relief at +source, s. 191(7)), not to the annual allowance. The model takes personal +pension contributions as relief at source and employee contributions as a net +pay arrangement. The annual allowance charge (s. 227) then taxes the pension +input amount above the allowance, plus any unused allowance brought forward +(s. 228A), as the top slice of reduced net income at the non-savings rates +(s. 227(4A)), with the rate limits raised by relief-at-source contributions +and grossed-up Gift Aid (s. 227(4C)), or at the Scottish rates with the +starter band at the Scottish basic rate (s. 227(4AA)). + +Invariants, for any generated population of single adults with contributions +split between relief at source and net pay: + +1. Relief bounds: relief is the lesser of the contributions and the s. 190 + limit (the basic-amount increase capped at relief-at-source contributions) + for anyone under 75, and nil at 75 or over. +2. The excess is taxed once: raising contributions, up to relevant earnings, + never raises income tax by more than it raises the charge. So income tax + before the charge never rises with contributions. +3. No double taxation: for someone whose income is all non-savings income, + contributing more than the allowance, up to relevant earnings, never costs + more income tax than contributing up to the allowance. +4. Charge bounds: nil exactly when the chargeable amount is nil, and between + the lowest and highest rate charged times the chargeable amount. +5. Differential: the charge equals an independent band-by-band sum of the + chargeable amount stacked on reduced net income. +6. Carry-forward: unused allowance reduces the chargeable amount one for one + until it is nil, and never raises the charge. + +Invariant 3 is restricted to non-savings income. With dividends on top, the +relief comes off non-savings income and lets dividends fall to lower dividend +rates, while s. 227(4A) charges the excess at the non-savings rates, so income +tax can rise (intended: that is what the statute does). It also stops where +contributions use up income after allowances: relief beyond that is worth +nothing, while the charge still falls on the whole input amount (also +intended). And it is restricted to taxpayers outside Scotland. The model gives +relief at source as a deduction, which relieves a Scottish starter-rate slice +at 19%, while the charge on that slice is at the Scottish basic rate +(s. 227(4AA)), so income tax can rise by up to 1% of the starter band +(a model deviation: relief at source pays 20%; see the YAML example). +""" + +import numpy as np +from hypothesis import HealthCheck, given, settings +from hypothesis import strategies as st + +from policyengine_uk import Simulation + +PROPERTY_SETTINGS = settings( + max_examples=10, + deadline=None, + derandomize=True, + suppress_health_check=[HealthCheck.too_slow, HealthCheck.data_too_large], +) +# 2020: £40,000 allowance, £4,000 tapered minimum. 2024: £60,000 allowance. +# 2026: Scottish starter band present; 2027: property income rates. +YEARS = [2020, 2024, 2026, 2027] +REGIONS = ["LONDON", "NORTH_EAST", "WALES", "SCOTLAND"] +TOLERANCE = 0.01 +# Simulated values are float32: allow a relative error on large amounts. +RELATIVE_TOLERANCE = 1e-6 + + +def _close(actual, expected): + return abs(actual - expected) <= max(TOLERANCE, RELATIVE_TOLERANCE * abs(expected)) + + +person_strategy = st.fixed_dictionaries( + { + "age": st.integers(18, 80), + "employment_income": st.integers(0, 400_000), + "self_employment_income": st.integers(-20_000, 200_000), + "employer_pension_contributions": st.integers(0, 80_000), + "contribution_share": st.floats(0, 1.2), + # Share of contributions paid through a net pay arrangement. + "net_pay_share": st.sampled_from([0.0, 0.5, 1.0]), + "gift_aid": st.integers(0, 5_000), + "savings_interest_income": st.integers(0, 30_000), + "dividend_income": st.integers(0, 80_000), + "unused_pension_annual_allowance": st.integers(0, 120_000), + "region": st.sampled_from(REGIONS), + } +) +population_strategy = st.lists(person_strategy, min_size=4, max_size=12) + + +def _situation(people, year, overrides=None): + overrides = overrides or {} + situation = {"people": {}, "benunits": {}, "households": {}} + for i, person in enumerate(people): + name = f"p{i}" + values = {**person, **overrides.get(i, {})} + situation["people"][name] = { + key: {year: values[key]} + for key in [ + "age", + "employment_income", + "self_employment_income", + "employer_pension_contributions", + "personal_pension_contributions", + "employee_pension_contributions_reported", + "gift_aid", + "savings_interest_income", + "dividend_income", + "unused_pension_annual_allowance", + ] + } + situation["benunits"][f"b{i}"] = {"members": [name]} + situation["households"][f"h{i}"] = { + "members": [name], + "region": {year: values["region"]}, + } + return situation + + +def _relevant_earnings(person): + return person["employment_income"] + max(0, person["self_employment_income"]) + + +def _with_contributions(people, contributions): + return [ + { + **person, + "personal_pension_contributions": float(c) * (1 - person["net_pay_share"]), + "employee_pension_contributions_reported": float(c) + * person["net_pay_share"], + } + for person, c in zip(people, contributions) + ] + + +def _calc(people, year, variables): + sim = Simulation(situation=_situation(people, year)) + return {v: np.array(sim.calculate(v, year), dtype=float) for v in variables} + + +def _base_contributions(people): + return [p["contribution_share"] * max(_relevant_earnings(p), 3_600) for p in people] + + +@PROPERTY_SETTINGS +@given(population_strategy, st.sampled_from(YEARS)) +def test_relief_is_the_section_190_limit(people, year): + people = _with_contributions(people, _base_contributions(people)) + out = _calc(people, year, ["pension_contributions_relief"]) + basic_amount = 3_600 + for i, person in enumerate(people): + earnings = _relevant_earnings(person) + relief_at_source = person["personal_pension_contributions"] + total = relief_at_source + person["employee_pension_contributions_reported"] + limit = earnings + min(max(0, basic_amount - earnings), relief_at_source) + expected = min(total, limit) if person["age"] < 75 else 0 + assert _close(out["pension_contributions_relief"][i], expected) + + +@PROPERTY_SETTINGS +@given(population_strategy, st.sampled_from(YEARS), st.floats(0, 1)) +def test_extra_contributions_never_raise_tax_by_more_than_the_charge( + people, year, step +): + # Two contribution levels, both within relevant earnings. + earnings = np.array([max(_relevant_earnings(p), 3_600) for p in people]) + low = np.array([min(p["contribution_share"], 1) for p in people]) * earnings + high = low + step * (earnings - low) + variables = ["income_tax", "personal_pension_contributions_tax"] + before = _calc(_with_contributions(people, low), year, variables) + after = _calc(_with_contributions(people, high), year, variables) + tax_rise = after["income_tax"] - before["income_tax"] + charge_rise = ( + after["personal_pension_contributions_tax"] + - before["personal_pension_contributions_tax"] + ) + assert np.all(tax_rise <= charge_rise + TOLERANCE) + + +@PROPERTY_SETTINGS +@given(population_strategy, st.sampled_from(YEARS), st.floats(0, 1)) +def test_contributions_above_the_allowance_are_not_taxed_twice(people, year, step): + # Non-savings income only, under 75, no carry-forward: contributions of + # exactly the allowance (net of employer contributions) against any + # amount from there up to relevant earnings. + people = [ + { + **p, + "age": min(p["age"], 74), + "savings_interest_income": 0, + "dividend_income": 0, + "gift_aid": 0, + "unused_pension_annual_allowance": 0, + "region": "NORTH_EAST" if p["region"] == "SCOTLAND" else p["region"], + } + for p in people + ] + zero_sim = Simulation( + situation=_situation(_with_contributions(people, [0] * len(people)), year) + ) + allowance = np.array( + zero_sim.calculate("pension_annual_allowance", year), dtype=float + ) + # Income after allowances with no contributions. Relief beyond it is worth + # nothing, but the charge still falls on the input amount, so the + # comparison stops there as well as at relevant earnings. + taxable_income = np.maximum( + 0, + np.array(zero_sim.calculate("adjusted_net_income", year), dtype=float) + - np.array(zero_sim.calculate("allowances", year), dtype=float), + ) + earnings = np.array([_relevant_earnings(p) for p in people], dtype=float) + upper = np.minimum(earnings, taxable_income) + employer = np.array([p["employer_pension_contributions"] for p in people]) + at_allowance = np.clip(allowance - employer, 0, earnings) + above = at_allowance + step * np.maximum(0, upper - at_allowance) + tax_at = _calc(_with_contributions(people, at_allowance), year, ["income_tax"]) + tax_above = _calc(_with_contributions(people, above), year, ["income_tax"]) + assert np.all(tax_above["income_tax"] <= tax_at["income_tax"] + TOLERANCE) + + +def _reference_charge(chargeable, reduced_net_income, thresholds, rates, extension): + """Band-by-band sum of the chargeable amount stacked on income, with every + rate limit raised by ``extension``.""" + bottom = reduced_net_income + top = reduced_net_income + chargeable + lowers = [thresholds[0]] + [t + extension for t in thresholds[1:]] + uppers = lowers[1:] + [np.inf] + charge = 0.0 + for lower, upper_limit, rate in zip(lowers, uppers, rates): + charge += rate * max(0.0, min(top, upper_limit) - max(bottom, lower)) + return charge + + +@PROPERTY_SETTINGS +@given(population_strategy, st.sampled_from(YEARS)) +def test_charge_matches_band_by_band_reference(people, year): + people = _with_contributions(people, _base_contributions(people)) + sim = Simulation(situation=_situation(people, year)) + chargeable = np.array( + sim.calculate("pension_annual_allowance_chargeable_amount", year), dtype=float + ) + charge = np.array( + sim.calculate("personal_pension_contributions_tax", year), dtype=float + ) + get = lambda v: np.array(sim.calculate(v, year), dtype=float) # noqa: E731 + # s. 227(4B)-(4C): reduced net income keeps relief-at-source contributions + # and Gift Aid, which raise the rate limits by their gross amounts. + relief_at_source = np.minimum( + get("personal_pension_contributions"), get("pension_contributions_relief") + ) + extension = get("gift_aid_grossed_up") + relief_at_source + reduced_net_income = np.maximum( + 0, + get("adjusted_net_income") + - np.maximum(0, get("allowances") - get("gift_aid") - relief_at_source), + ) + scottish = np.array(sim.calculate("pays_scottish_income_tax", year)) + rates = sim.tax_benefit_system.parameters(year).gov.hmrc.income_tax.rates + uk_thresholds, uk_rates = list(rates.uk.thresholds), list(rates.uk.rates) + sco_thresholds = list(rates.scotland.rates.thresholds) + sco_rates = list(rates.scotland.rates.rates) + if year >= 2018: + # s. 227(4AA): the starter band is charged at the Scottish basic rate. + sco_rates[0] = sco_rates[1] + for i in range(len(people)): + thresholds, band_rates = ( + (sco_thresholds, sco_rates) if scottish[i] else (uk_thresholds, uk_rates) + ) + expected = _reference_charge( + chargeable[i], reduced_net_income[i], thresholds, band_rates, extension[i] + ) + assert _close(charge[i], expected) + # Bounds: nil exactly when nothing is chargeable, and between the + # lowest and highest rate charged. + assert (charge[i] == 0) == (chargeable[i] == 0) + slack = max(TOLERANCE, RELATIVE_TOLERANCE * max(band_rates) * chargeable[i]) + assert charge[i] >= min(band_rates) * chargeable[i] - slack + assert charge[i] <= max(band_rates) * chargeable[i] + slack + + +@PROPERTY_SETTINGS +@given(population_strategy, st.sampled_from(YEARS), st.integers(0, 150_000)) +def test_unused_allowance_reduces_chargeable_amount_one_for_one(people, year, extra): + people = _with_contributions(people, _base_contributions(people)) + variables = [ + "pension_annual_allowance_chargeable_amount", + "personal_pension_contributions_tax", + ] + before = _calc(people, year, variables) + more_unused = [ + { + **p, + "unused_pension_annual_allowance": p["unused_pension_annual_allowance"] + + extra, + } + for p in people + ] + after = _calc(more_unused, year, variables) + chargeable_before = before["pension_annual_allowance_chargeable_amount"] + expected = np.maximum(0, chargeable_before - extra) + assert np.allclose( + after["pension_annual_allowance_chargeable_amount"], expected, atol=TOLERANCE + ) + assert np.all( + after["personal_pension_contributions_tax"] + <= before["personal_pension_contributions_tax"] + TOLERANCE + ) + + +def test_scottish_basic_band_is_not_lifted_when_the_starter_band_is_removed(): + """A reform that removes the Scottish starter band (null threshold, basic + band from zero) leaves the lowest band at the basic rate: the charge is + not lifted to the intermediate rate.""" + from policyengine_uk.utils.scenario import Scenario + + def remove_starter_band(simulation): + system = simulation.tax_benefit_system + system.reset_parameters() + brackets = system.parameters.gov.hmrc.income_tax.rates.scotland.rates.brackets + brackets[0].threshold.update(period="year:2026-01-01:1", value=None) + brackets[1].threshold.update(period="year:2026-01-01:1", value=0) + system.process_parameters() + + situation = { + "people": { + "p": { + "age": {2026: 45}, + "employment_income": {2026: 12_570}, + "employer_pension_contributions": {2026: 70_000}, + } + }, + "benunits": {"b": {"members": ["p"]}}, + "households": {"h": {"members": ["p"], "region": {2026: "SCOTLAND"}}}, + } + sim = Simulation( + situation=situation, + scenario=Scenario( + simulation_modifier=remove_starter_band, applied_before_data_load=True + ), + ) + rates = sim.tax_benefit_system.parameters(2026).gov.hmrc.income_tax.rates + assert float(rates.scotland.rates.rates[0]) == 0.2 + # Reduced net income 0; chargeable amount 10_000, all in the basic band. + charge = float(sim.calculate("personal_pension_contributions_tax", 2026)[0]) + assert abs(charge - 10_000 * 0.2) < TOLERANCE diff --git a/policyengine_uk/variables/gov/hmrc/pensions/pension_annual_allowance_chargeable_amount.py b/policyengine_uk/variables/gov/hmrc/pensions/pension_annual_allowance_chargeable_amount.py new file mode 100644 index 0000000000..c9c4e300c4 --- /dev/null +++ b/policyengine_uk/variables/gov/hmrc/pensions/pension_annual_allowance_chargeable_amount.py @@ -0,0 +1,34 @@ +from policyengine_uk.model_api import * + + +class pension_annual_allowance_chargeable_amount(Variable): + value_type = float + entity = Person + label = "Chargeable amount for the pension annual allowance charge" + documentation = ( + "The default chargeable amount (FA 2004 s. 227ZA(3)): the total pension " + "input amount less the annual allowance, which unused annual allowance " + "brought forward increases (s. 228A(2)). Nil if the input amount is " + "within that allowance." + ) + definition_period = YEAR + reference = [ + dict( + title="Finance Act 2004 s. 227ZA", + href="https://www.legislation.gov.uk/ukpga/2004/12/section/227ZA", + ), + dict( + title="Finance Act 2004 s. 228A", + href="https://www.legislation.gov.uk/ukpga/2004/12/section/228A", + ), + ] + unit = GBP + + def formula(person, period, parameters): + pension_input_amount = person( + "pension_contributions_for_annual_allowance", period + ) + annual_allowance = person("pension_annual_allowance", period) + max_( + 0, person("unused_pension_annual_allowance", period) + ) + return max_(0, pension_input_amount - annual_allowance) diff --git a/policyengine_uk/variables/gov/hmrc/pensions/pension_contributions_relief.py b/policyengine_uk/variables/gov/hmrc/pensions/pension_contributions_relief.py index a506e58726..6602af436c 100644 --- a/policyengine_uk/variables/gov/hmrc/pensions/pension_contributions_relief.py +++ b/policyengine_uk/variables/gov/hmrc/pensions/pension_contributions_relief.py @@ -5,25 +5,62 @@ class pension_contributions_relief(Variable): value_type = float entity = Person label = "Reduction in taxable income from pension contributions" - definition_period = YEAR - reference = dict( - title="Finance Act 2004 s. 188-194", - href="https://www.legislation.gov.uk/ukpga/2004/12/section/188", + documentation = ( + "Relief for the contributions an individual pays to registered pension " + "schemes (FA 2004 s. 188), up to the annual limit for relief: the " + "individual's relevant UK earnings, raised to the basic amount where " + "earnings are lower (s. 190). Only relief at source can give the part " + "above earnings (s. 191(7)); the model takes personal pension " + "contributions as relief at source and employee contributions as a " + "net pay arrangement. The annual allowance does not limit relief. " + "Contributions above it are relieved here, and the annual allowance " + "charge (personal_pension_contributions_tax) then recovers that relief " + "(s. 227)." ) + definition_period = YEAR + reference = [ + dict( + title="Finance Act 2004 s. 188", + href="https://www.legislation.gov.uk/ukpga/2004/12/section/188", + ), + dict( + title="Finance Act 2004 s. 189", + href="https://www.legislation.gov.uk/ukpga/2004/12/section/189", + ), + dict( + title="Finance Act 2004 s. 190", + href="https://www.legislation.gov.uk/ukpga/2004/12/section/190", + ), + dict( + title="Finance Act 2004 s. 191", + href="https://www.legislation.gov.uk/ukpga/2004/12/section/191", + ), + ] unit = GBP def formula(person, period, parameters): + hmrc = parameters(period).gov.hmrc contributions = person("pension_contributions", period) - pension_allowance = person("pension_annual_allowance", period) - age_limit = parameters( - period - ).gov.hmrc.pensions.pension_contributions_relief_age_limit - income = add(person, period, ["employment_income", "self_employment_income"]) - under_age_limit = person("age", period) < age_limit - basic_amount = parameters( - period - ).gov.hmrc.income_tax.reliefs.pension_contribution.basic_amount - tax_relief = min_(income, contributions) * under_age_limit - max_pension_relief = max_(basic_amount, pension_allowance) - - return min_(tax_relief, max_pension_relief) + # Relevant UK earnings (s. 189(2)) are employment income and trading + # income. A trading loss gives no relevant earnings; it does not + # reduce employment income. + relevant_uk_earnings = person("employment_income", period) + max_( + 0, person("self_employment_income", period) + ) + # s. 190(1)-(2): relief up to relevant UK earnings, raised to the basic + # amount where earnings are lower. s. 191(7): only relief at source + # (personal pension contributions here) can give that increase. + basic_amount_increase = min_( + max_( + 0, + hmrc.income_tax.reliefs.pension_contribution.basic_amount + - relevant_uk_earnings, + ), + person("personal_pension_contributions", period), + ) + annual_limit = relevant_uk_earnings + basic_amount_increase + # Contributions paid after age 75 are not relievable (s. 188(3)(a)). + under_age_limit = ( + person("age", period) < hmrc.pensions.pension_contributions_relief_age_limit + ) + return min_(contributions, annual_limit) * under_age_limit diff --git a/policyengine_uk/variables/gov/hmrc/pensions/private_pension_contributions_tax.py b/policyengine_uk/variables/gov/hmrc/pensions/private_pension_contributions_tax.py index 4fad564e10..17d05685f0 100644 --- a/policyengine_uk/variables/gov/hmrc/pensions/private_pension_contributions_tax.py +++ b/policyengine_uk/variables/gov/hmrc/pensions/private_pension_contributions_tax.py @@ -1,10 +1,36 @@ from policyengine_uk.model_api import * +def _top_slice_charge(bottom, top, thresholds, rates, extension): + """Tax on the slice from ``bottom`` to ``top`` of income, at ``rates`` + between ``thresholds``, every limit above the first raised by + ``extension``.""" + charge = 0 + for i, rate in enumerate(rates): + lower = thresholds[i] + (extension if i > 0 else 0) + upper = thresholds[i + 1] + extension if i + 1 < len(thresholds) else np.inf + charge = charge + rate * max_(0, min_(top, upper) - max_(bottom, lower)) + return charge + + class personal_pension_contributions_tax(Variable): value_type = float entity = Person - label = "Reduction in taxable income from pension contributions to pensions other than the State Pension" + label = "Pension annual allowance charge" + documentation = ( + "The annual allowance charge (FA 2004 s. 227) on the chargeable amount, " + "the pension input amount above the annual allowance. It is charged at " + "the basic, higher and additional rates on the slices of the chargeable " + "amount that fall in each band when it is added to the top of the " + "individual's reduced net income, their income after allowances " + "(s. 227(4A)-(4B)), with the rate limits raised by relief-at-source " + "contributions and grossed-up Gift Aid (s. 227(4C)). A Scottish " + "taxpayer pays the Scottish rates, with the Scottish basic rate on any " + "slice within the Scottish basic rate limit (s. 227(4AA)). " + "Contributions above the annual allowance still get relief " + "(pension_contributions_relief), so the charge recovers that relief " + "once rather than taxing the excess twice." + ) definition_period = YEAR reference = [ dict( @@ -19,16 +45,67 @@ class personal_pension_contributions_tax(Variable): unit = GBP def formula(person, period, parameters): - p = parameters(period).gov.hmrc.income_tax.rates.uk - taxed_income = person("taxed_income", period) + rates = parameters(period).gov.hmrc.income_tax.rates + chargeable_amount = person("pension_annual_allowance_chargeable_amount", period) + # The model deducts relief at source (personal pension contributions) + # and Gift Aid from income, where the law leaves them in reduced net + # income and raises the rate limits instead (s. 227(4C); FA 2004 + # s. 192(4), ITA 2007 s. 414). Undo the deduction and raise the + # limits, as capital_gains_tax does for the basic rate band. Net pay + # contributions stay deducted, as in law. + relief_at_source = min_( + person("personal_pension_contributions", period), + person("pension_contributions_relief", period), + ) + rate_limit_extension = person("gift_aid_grossed_up", period) + relief_at_source + allowances_at_step_3 = max_( + 0, + person("allowances", period) + - person("gift_aid", period) + - relief_at_source, + ) + # Reduced net income: income after Step 3 of ITA 2007 s. 23 (s. 227(4B)). + reduced_net_income = max_( + 0, person("adjusted_net_income", period) - allowances_at_step_3 + ) + top_of_charge = reduced_net_income + chargeable_amount + + uk_charge = _top_slice_charge( + reduced_net_income, + top_of_charge, + list(rates.uk.thresholds), + list(rates.uk.rates), + rate_limit_extension, + ) - personal_pension_contributions = person( - "pension_contributions_for_annual_allowance", period + # s. 227(4AA)(b)(i): no slice is charged at the starter rate. The + # Scottish basic rate applies to every slice up to the Scottish basic + # rate limit, so charge the starter band at the basic rate. The + # starter bracket (the first) is null before 2018-19, when the lowest + # Scottish rate was the basic rate; it is present only with both a + # rate and a threshold. + scottish_rates = rates.scotland.rates + scottish_band_rates = list(scottish_rates.rates) + starter_bracket = person.simulation.tax_benefit_system.parameters.gov.hmrc.income_tax.rates.scotland.rates.brackets[ + 0 + ] + has_starter_band = ( + starter_bracket.rate(period.start) is not None + and starter_bracket.threshold(period.start) is not None + and len(scottish_band_rates) > 1 ) - pension_annual_allowance = person("pension_annual_allowance", period) - taxable_contributions = ( - personal_pension_contributions - pension_annual_allowance + if has_starter_band: + scottish_band_rates[0] = scottish_band_rates[1] + scottish_charge = _top_slice_charge( + reduced_net_income, + top_of_charge, + list(scottish_rates.thresholds), + scottish_band_rates, + rate_limit_extension, ) - tax_rate = p.marginal_rates(taxed_income) - return max_(0, taxable_contributions * tax_rate) + return where( + person("pays_scottish_income_tax", period), + scottish_charge, + uk_charge, + ) diff --git a/policyengine_uk/variables/input/unused_pension_annual_allowance.py b/policyengine_uk/variables/input/unused_pension_annual_allowance.py new file mode 100644 index 0000000000..59b2549769 --- /dev/null +++ b/policyengine_uk/variables/input/unused_pension_annual_allowance.py @@ -0,0 +1,23 @@ +from policyengine_uk.model_api import * + + +class unused_pension_annual_allowance(Variable): + label = "unused pension annual allowance brought forward" + documentation = ( + "Unused annual allowance from the three previous tax years that is " + "available for this tax year (FA 2004 s. 228A(5)): the amount by which " + "each of those years' annual allowance exceeded the total pension " + "input amount, for years in which the individual was a member of a " + "registered pension scheme, less any part already used up in an " + "intervening year (earliest year first). It increases this year's " + "annual allowance (s. 228A(2)). Survey data does not record past " + "pension input amounts, so this defaults to nil." + ) + entity = Person + definition_period = YEAR + value_type = float + unit = GBP + reference = dict( + title="Finance Act 2004 s. 228A", + href="https://www.legislation.gov.uk/ukpga/2004/12/section/228A", + )