Limit pension relief by earnings and charge the annual allowance

changelog.d/2237.fixed.md

@@ -0,0 +1 @@
+- Limited pension contributions relief by relevant UK earnings (or the £3,600 basic amount through relief at source) instead of the annual allowance. Calculated the annual allowance charge across UK or Scottish tax bands with unused allowance carried forward, applying the statutory named-rate ordinary-income condition to the RAS band extension and preserving Gift Aid's separate gross band extension. Separate savings and UK property rates do not establish RAS eligibility.

docs/engineering/gift-aid.md

@@ -85,3 +85,44 @@ additional relief. Changing tax band can also increase the Personal Savings
 Allowance discretely under s. 12B, so its relief cannot be bounded by a constant
 times a very small gift. Tests of the continuous band-extension bound must
 allow for that allowance change or hold the zero-rate allowance fixed.
+
+## Pension annual allowance charge
+
+The annual allowance charge uses reduced net income after ITA 2007 s. 23
+Step 3 ([FA 2004 s. 227(4B)](https://www.legislation.gov.uk/ukpga/2004/12/section/227)).
+It starts from `net_income`, before the s. 58 gross Gift Aid deduction, and
+subtracts `allowances` after removing relieved relief-at-source pension
+contributions. Gift Aid is already excluded from those allowances. The charge
+then stacks the excess pension input amount on this base. Gross Gift Aid
+extends the rate limits under s. 227(4C), independently of pension relief.
+This keeps the Gift Aid adjustment to adjusted net income separate from the
+amount charged to tax.
+
+The pension extension is conditional. [FA 2004 s. 192(4)/(4A)](https://www.legislation.gov.uk/ukpga/2004/12/section/192)
+requires ordinary income, apart from relief under that section, to attract
+higher/additional-rate tax, or a Scottish rate above basic. The charge uses
+only limits increased under s. 192; s. 227(5) excludes the pension excess from
+income, so that excess cannot satisfy the condition. The model tests ordinary
+liability before RAS relief, retaining Gift Aid's extension and the existing
+allowance allocation. Scottish liability uses non-savings income, including
+property income. The UK condition names the higher and additional rates:
+separate dividend rates, savings rates from 2017-18 and property rates from
+2027-28 do not satisfy it. [FA 2016 s. 6](https://www.legislation.gov.uk/ukpga/2016/24/section/6/enacted)
+introduced savings rates and expressly added them to some other higher-rate
+tests, without expanding s. 192(4). [FA 2026 s. 6](https://www.legislation.gov.uk/ukpga/2026/11/section/6/enacted)
+and [Schedule 1](https://www.legislation.gov.uk/ukpga/2026/11/schedule/1/enacted)
+introduce property rates without expanding s. 192 either. Before those
+changes, income charged at ordinary higher/additional rates can qualify.
+Scottish property remains subject to Scottish rates under ITA 2007
+s. 11CA(4), so it can still meet s. 192(4A).
+
+[HMRC PTM056120](https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm056120)
+describes the RAS extension for the annual allowance charge without stating
+this condition. Its examples do not resolve low-income contributors whose
+pension excess crosses a band. The model follows the statutory condition;
+the [2018/459 explanatory memorandum, paragraph 7.4](https://www.legislation.gov.uk/uksi/2018/459/pdfs/uksiem_20180459_en.pdf)
+also describes an above-basic Scottish liability requirement. Assessment
+practice under the broader manual description remains a methodology question.
+The charge can exceed relief on the contribution when ordinary income fails
+the condition, so contribution and Gift Aid tax-monotonicity comparisons must
+hold eligibility for the RAS extension fixed.

policyengine_uk/tests/policy/baseline/gov/hmrc/pensions/pension_contributions_for_annual_allowance.yaml

@@ -76,5 +76,5 @@
     pension_contributions_via_salary_sacrifice: 0
   output:
     # Total: 10_000 + 5_000 + 50_000 = 65_000
-    # This exceeds the 2024 AA of 40_000 (verified separately by AA tax charge test)
+    # This exceeds the 2024 AA of 60_000 (verified separately by AA tax charge test)
     pension_contributions_for_annual_allowance: 65_000

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