Relieve a miscellaneous loss only against miscellaneous income

changelog.d/2326.fixed.md

@@ -0,0 +1 @@
+- Stop relieving a miscellaneous loss against other income in Income Tax, adjusted net income, total income and Universal Credit earnings: ITA 2007 s. 152(4) allows it only against miscellaneous income.

policyengine_uk/tests/policy/baseline/gov/hmrc/income_tax/bases/taxable_miscellaneous_income.yaml

@@ -0,0 +1,63 @@
+# A miscellaneous loss is relieved only against miscellaneous income
+# (ITA 2007 s. 152(4)). 2026-27: personal allowance £12,570, basic rate 20%
+# to £50,270, higher rate 40%.
+
+- name: Case 1, miscellaneous income is taxed with other income.
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    age: 45
+    employment_income: 30_000
+    miscellaneous_income: 5_000
+  output:
+    taxable_miscellaneous_income: 5_000
+    # (35,000 - 12,570) x 20%.
+    income_tax: 4_486
+
+- name: Case 2, a miscellaneous loss does not reduce tax on pay.
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    age: 45
+    employment_income: 50_000
+    miscellaneous_income: -10_000
+  output:
+    taxable_miscellaneous_income: 0
+    # (50,000 - 12,570) x 20%, as with no loss.
+    income_tax: 7_486
+
+- name: Case 3, nor adjusted net income.
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    age: 45
+    employment_income: 110_000
+    miscellaneous_income: -20_000
+  output:
+    taxable_miscellaneous_income: 0
+    adjusted_net_income: 110_000
+    # Personal allowance 12,570 - (110,000 - 100,000) / 2 = 7,570; taxable
+    # 102,430: 37,700 x 20% + 64,730 x 40% = 33,432.
+    income_tax: 33_432
+
+- name: Case 4, total income ignores a miscellaneous loss.
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    age: 70
+    private_pension_income: 40_000
+    miscellaneous_income: -10_000
+  output:
+    total_income: 40_000
+
+- name: Case 5, a miscellaneous loss does not reduce Universal Credit earnings.
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    age: 30
+    employment_income: 30_000
+    miscellaneous_income: -10_000
+  output:
+    # 30,000 less income tax (30,000 - 12,570) x 20% = 3,486 and primary
+    # Class 1 (30,000 - 12,570) x 8% = 1,394.40.
+    uc_individual_earned_income_before_mif: 30_000 - 3_486 - 1_394.40

policyengine_uk/tests/test_miscellaneous_loss_properties.py

@@ -0,0 +1,72 @@
+"""A miscellaneous loss is relieved only against miscellaneous income
+(ITA 2007 s. 152(4)).
+
+Invariants:
+
+1. For any pay, savings, dividends and pension income, a miscellaneous loss
+   leaves Income Tax, adjusted net income and total income exactly as they are
+   with no miscellaneous income.
+2. For any pay, positive miscellaneous income is taxable in full.
+"""
+
+from hypothesis import HealthCheck, example, given, settings
+from hypothesis import strategies as st
+
+from policyengine_uk import Simulation
+
+
+def _calc(misc, pay, savings, dividends, pension):
+    situation = {
+        "people": {
+            "p": {
+                "age": {"2026": 50},
+                "employment_income": {"2026": pay},
+                "savings_interest_income": {"2026": savings},
+                "dividend_income": {"2026": dividends},
+                "private_pension_income": {"2026": pension},
+                "miscellaneous_income": {"2026": misc},
+            }
+        },
+        "benunits": {"b": {"members": ["p"]}},
+        "households": {"h": {"members": ["p"], "country": {"2026": "ENGLAND"}}},
+    }
+    sim = Simulation(situation=situation)
+    return {
+        name: float(sim.calculate(name, 2026)[0])
+        for name in (
+            "income_tax",
+            "adjusted_net_income",
+            "total_income",
+            "taxable_miscellaneous_income",
+        )
+    }
+
+
+amounts = st.floats(min_value=0, max_value=150_000, allow_nan=False)
+
+
+@settings(max_examples=25, deadline=None, suppress_health_check=[HealthCheck.too_slow])
+@example(loss=20_000, pay=110_000, savings=0, dividends=0, pension=0)
+@given(
+    loss=st.floats(min_value=1, max_value=500_000, allow_nan=False),
+    pay=amounts,
+    savings=st.floats(min_value=0, max_value=20_000),
+    dividends=st.floats(min_value=0, max_value=20_000),
+    pension=st.floats(min_value=0, max_value=40_000),
+)
+def test_a_miscellaneous_loss_changes_nothing_else(
+    loss, pay, savings, dividends, pension
+):
+    with_loss = _calc(-loss, pay, savings, dividends, pension)
+    without = _calc(0, pay, savings, dividends, pension)
+    assert with_loss["taxable_miscellaneous_income"] == 0
+    assert abs(with_loss["income_tax"] - without["income_tax"]) < 0.01
+    assert abs(with_loss["adjusted_net_income"] - without["adjusted_net_income"]) < 0.01
+    assert abs(with_loss["total_income"] - without["total_income"]) < 0.01
+
+
+@settings(max_examples=6, deadline=None, suppress_health_check=[HealthCheck.too_slow])
+@given(income=st.floats(min_value=0, max_value=100_000, allow_nan=False), pay=amounts)
+def test_positive_miscellaneous_income_is_taxable_in_full(income, pay):
+    result = _calc(income, pay, 0, 0, 0)
+    assert abs(result["taxable_miscellaneous_income"] - income) < 0.01

policyengine_uk/variables/gov/dwp/universal_credit/income/uc_individual_earned_income_before_mif.py

@@ -35,7 +35,10 @@ def formula(person, period, parameters):
         # The deductions are the person's own and come off only their own
         # earnings, so one partner's tax, NI or pension contributions never
         # reduce the other partner's earned income.
-        earnings_components = ["employment_income", "miscellaneous_income"]
+        # Miscellaneous income as income tax counts it, so a loss does not
+        # reduce pay (and matches uc_income_tax_on_earnings). Whether it is
+        # earnings at all is issue #1961.
+        earnings_components = ["employment_income", "taxable_miscellaneous_income"]
         bi = parameters(period).gov.contrib.ubi_center.basic_income
         if bi.interactions.include_in_means_tests:
             earnings_components.append("basic_income")

policyengine_uk/variables/gov/hmrc/income_tax/bases/taxable_miscellaneous_income.py

@@ -5,11 +5,31 @@ class taxable_miscellaneous_income(Variable):
     value_type = float
     entity = Person
     label = "Amount of miscellaneous income that is taxable"
-    definition_period = YEAR
-    reference = dict(
-        title="Income Tax Act (Trading and Other Income) 2005, s. 574",
-        href="https://www.legislation.gov.uk/ukpga/2005/5/section/574",
+    documentation = (
+        "Miscellaneous income charged to income tax. On a claim, a loss on a "
+        "miscellaneous transaction is relieved only against relevant "
+        "miscellaneous income: income under the same section 1016 provision as "
+        "the loss (ITA 2007 s. 152(4)-(5)). It is never set against other "
+        "income, so a net loss counts as nil here. The model holds one net "
+        "figure per person, so it assumes the items netted inside "
+        "miscellaneous_income can be relieved against each other; that can "
+        "undertax a person with a gain under one provision and a loss under "
+        "another. The input also covers income from sources outside section "
+        "1016, some of which carry no loss relief at all. Carrying a loss "
+        "forward against later years' miscellaneous income is not modelled."
     )
+    definition_period = YEAR
+    reference = [
+        dict(
+            title="Income Tax (Trading and Other Income) Act 2005 s. 574",
+            href="https://www.legislation.gov.uk/ukpga/2005/5/section/574",
+        ),
+        dict(
+            title="Income Tax Act 2007 s. 152",
+            href="https://www.legislation.gov.uk/ukpga/2007/3/section/152",
+        ),
+    ]
     unit = GBP
 
-    adds = ["miscellaneous_income"]
+    def formula(person, period, parameters):
+        return max_(0, person("miscellaneous_income", period))

policyengine_uk/variables/gov/hmrc/income_tax/total_income.py

@@ -20,5 +20,6 @@ class total_income(Variable):
         "property_income",
         "savings_interest_income",
         "dividend_income",
-        "miscellaneous_income",
+        # A miscellaneous loss is never part of total income (ITA 2007 s. 152(4)).
+        "taxable_miscellaneous_income",
     ]