Relieve pension contributions to relevant earnings and charge the annual allowance excess once

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.

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

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