Fix statutory pension annual allowance taper income tests

changelog.d/2244.fixed.md

@@ -0,0 +1,6 @@
+- Corrected the pension annual allowance taper to use separate threshold and adjusted income tests, including employer pension inputs, full salary sacrifice before the NICs exemption cap and gross pension relief. Applied whole-pound rounding and the statutory limits from 2016–17 onwards.
+- Removed the NICs-only salary-sacrifice reclassification from the taper income tests, including post-75 and basic relief-at-source cases.
+- Excluded member contributions made at 75 or over from the default DC pension input while retaining all employer contributions and salary sacrifice.
+- Recomputed income-dependent trading-loss relief from actual income for both annual allowance income tests, including the general-income and relief-cap limits.
+- Limited trading-loss relief after relievable net-pay contributions in every year and kept supplied adjusted-net-income inputs independent of the NICs cap.
+- Restricted the basic pension-relief uplift above earnings to relief at source when rebuilding the annual allowance trading-loss cap.

docs/engineering/pension-annual-allowance.md

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+# Pension annual allowance taper
+
+[FA 2004 s. 228ZA](https://www.legislation.gov.uk/ukpga/2004/12/section/228ZA)
+requires both adjusted income and threshold income to exceed their limits.
+The threshold-income limit is the adjusted-income limit minus the standard
+annual allowance. The reduction rounds down to a whole pound before it is
+subtracted from the standard allowance, subject to the tapered minimum.
+
+| Tax years | Adjusted-income limit | Threshold-income limit | Minimum allowance |
+| --- | ---: | ---: | ---: |
+| 2016–17 to 2019–20 | £150,000 | £110,000 | £10,000 |
+| 2020–21 to 2022–23 | £240,000 | £200,000 | £4,000 |
+| From 2023–24 | £260,000 | £200,000 | £10,000 |
+
+The taper starts in 2016–17 under [Finance (No. 2) Act 2015, Schedule 4,
+paragraph 10](https://www.legislation.gov.uk/ukpga/2015/33/schedule/4/paragraph/10).
+[Finance Act 2020 s. 22](https://www.legislation.gov.uk/ukpga/2020/14/section/22)
+and [Finance (No. 2) Act 2023 s. 22](https://www.legislation.gov.uk/ukpga/2023/30/section/22)
+set the later limits. The original reduction multiplier is the standard
+allowance less £10,000, divided by £60,000: one half with the statutory
+£40,000 standard. From 2020–21 the multiplier is expressly one half.
+
+## Model income conventions
+
+The model's `net_income` includes income before pension relief; that relief
+is deducted separately through `allowances`. Employee contributions represent
+net pay and personal contributions represent gross relief at source (RAS).
+Both annual-allowance income tests use
+[`annual_allowance_net_income`](../../policyengine_uk/utils/pensions.py).
+This shared helper reconstructs the model's net-income convention from actual
+income, before separately modeled pension relief, excluding the NICs-only
+salary-sacrifice return. Accordingly:
+
+- `pension_annual_allowance_adjusted_income` adds the total pension input
+  amount to that reconstructed income, then subtracts the individual's actual
+  own contributions. The helper retains the s. 228ZA(4)(c) net-pay relief
+  add-back after limiting trading losses to income remaining after net pay.
+  Employer contributions and salary sacrifice are included. Relievable RAS
+  contributions made before age 75 do not
+  reduce adjusted income.
+- `pension_annual_allowance_threshold_income` starts from the same
+  reconstructed income, deducts pension relief recomputed on actual earnings
+  and contributions, then adds back relevant salary sacrifice. The relief
+  deduction combines the net-pay employment-income deduction under
+  [FA 2004 s. 193(2)](https://www.legislation.gov.uk/ukpga/2004/12/section/193)
+  and the gross RAS deduction
+  under s. 228ZA(5)(c).
+- Both measures exclude `pension_annual_allowance_taxable_lump_sum_death_benefits`.
+  This input must already be included in income elsewhere, such as private
+  pension income; it does not itself add income to the taxable base.
+
+Current-year trading-loss relief is income-dependent: the helper rebuilds
+adjusted total income and the [ITA 2007 s. 24A relief
+cap](https://www.legislation.gov.uk/ukpga/2007/3/section/24A) from actual earnings
+and member contributions, including the add-back for trading losses brought
+forward. Pension relief in this rebuilt cap uses the same RAS-aware helper
+as the income tests: [FA 2004 ss. 190(3) and
+191(7)](https://www.legislation.gov.uk/ukpga/2004/12/section/191) reserve the
+basic-amount uplift above earnings for RAS contributions. Pure net-pay
+payments receive relief only up to earnings, and no member relief applies
+from age 75. It then limits [s. 64 loss
+relief](https://www.legislation.gov.uk/ukpga/2007/3/section/64) to that cap and
+the actual income available after relievable net-pay contributions, within
+the earnings relief limit and before age 75. Section 193(2) takes net-pay
+contributions out of employment income itself; only the excess under
+s. 193(4) or (6) is a Step 2 deduction.
+[ITA 2007 s. 25(4)](https://www.legislation.gov.uk/ukpga/2007/3/section/25)
+prevents Step 2 relief from exceeding the remaining income. This limit
+applies in every model year, including before the NICs cap begins in 2029.
+It can therefore change pre-2029 allowances for people whose trading-loss
+relief is limited by income and who make relievable net-pay contributions.
+Removing synthetic pay after deducting the
+original relief would retain relief calculated on income the person did not
+receive. Threshold income also recomputes [FA 2004 ss. 188–191 pension
+relief](https://www.legislation.gov.uk/ukpga/2004/12/section/188) on actual
+earnings and contributions.
+
+An explicitly supplied `adjusted_net_income` is authoritative. For this input
+path, the helper restores gross Gift Aid and pension relief recomputed on
+actual contributions and earnings. It does not remove returned pay or
+reconstruct trading-loss relief: the supplied ANI contains neither synthetic
+pay nor relief recalculated by the NICs reclassification. The annual-allowance
+base is therefore independent of the NICs cap on this path too.
+
+Other modeled deductions do not depend on the returned pay: brought-forward
+trade losses, capital allowances and the trading allowance depend on trading
+profits. Property finance-cost relief is a downstream tax reducer. Gift Aid's
+adjusted-net-income deduction and rate-limit extension do not reduce either
+annual-allowance income measure. When ANI is supplied, the helper restores
+those ANI deductions, including the separate ITA 2007 s. 58 pension
+deduction. Charitable investment gifts and
+`other_deductions` remain in `allowances`; their statutory Step 2 treatment is
+an existing gap shared with adjusted net income.
+
+## Inputs and data limits
+
+Arrangements made on or after **9 July 2015** are relevant salary sacrifice
+under s. 228ZA(6). The default treats actual salary sacrifice as relevant
+because the survey does not record arrangement dates. Supply
+`pension_contributions_via_salary_sacrifice_pre_2015` for the part attributable
+to earlier arrangements. Its exclusion is limited to full salary sacrifice
+before the NICs exemption cap: that cap does not limit the s. 228ZA add-back.
+Flexible remuneration not
+represented by these contribution inputs needs an explicit threshold-income
+override.
+
+`pension_contributions_for_annual_allowance` is the shared pension input amount
+used by both the taper and the charge. The default DC input includes member
+contributions made before age 75, employer contributions and full actual
+salary sacrifice. Under [s. 233](https://www.legislation.gov.uk/ukpga/2004/12/section/233)
+and [s. 188(3)(a)](https://www.legislation.gov.uk/ukpga/2004/12/section/188),
+member contributions made at 75 or over are excluded; employer contributions
+still count. The model reads age on **6 October** for the whole year. In the
+year of a 75th birthday, member payments are therefore included or excluded
+for the whole year according to age on that date; payments are not split at
+the birthday. Contributions before 75 that exceed the earnings relief limit
+still count. Adjusted income subtracts all actual member contributions under
+s. 228ZA(4)(d)(ii), including those excluded from the post-75 DC input.
+For defined-benefit
+arrangements, supply the statutory total pension input amount, including
+valued DB accrual, through this variable. Cash employer funding is not a
+valuation of DB rights. Survey estimates retain the existing cash proxy;
+this correction does not reconstruct DB rights, overseas adjustments, unused
+allowance histories or anti-avoidance arrangements under s. 228ZB.
+
+[The NICs Act 2026](https://www.legislation.gov.uk/ukpga/2026/15/enacted)
+changes NICs treatment without changing s. 228ZA. From 2029, the model moves
+sacrifice above the NICs exemption cap into
+employee contributions and employment income. The AA calculations remove
+that synthetic return from both pay and member contributions and recompute
+income-dependent relief as described above. Pension relief preserves the
+basic RAS amount even when cash earnings are below £3,600 and gives no member
+relief from age 75. The DC input keeps the full employer sacrifice at every
+age. The threshold-income add-back uses the full
+sacrifice before this reclassification. The separate employer-cost wage
+response can still change income; it is held fixed when testing the cap's
+statutory effect.
+
+Cap invariance covers the two taper incomes, pension input and allowance.
+Charge comparisons additionally hold ordinary income-tax inputs fixed: the
+separate ANI and personal-allowance interaction can change the marginal tax
+charged on the same excess. Ordinary income tax retains its existing
+reclassification behavior; [#2454](https://github.com/PolicyEngine/policyengine-uk/issues/2454)
+tracks that separate defect.
+
+The taxable death-benefit and grandfathered-sacrifice inputs default to zero.
+Pension relief retains the model's aggregate earnings cap and allocation
+conventions. Historical years use calendar-year proxies for the named tax
+years; the 2015 transitional pension-input alignment rules are outside this
+taper calculation.

policyengine_uk/parameters/gov/hmrc/income_tax/allowances/annual_allowance/default.yaml

@@ -1,11 +1,13 @@
-description: Annual allowance for relief on pension contributions.
+description: Standard annual allowance for pension input amounts.
 values:
   2015-04-01: 40_000
   2023-04-06: 60_000
 metadata:
   unit: currency-GBP
   label: Annual allowance for pension contributions
   reference:
+  - title: Finance (No. 2) Act 2023 s. 20
+    href: https://www.legislation.gov.uk/ukpga/2023/30/section/20
   - title: Finance Act 2004 s. 228
     href: https://www.legislation.gov.uk/ukpga/2004/12/section/228
   - title: Tax on your private pension contributions

policyengine_uk/parameters/gov/hmrc/income_tax/allowances/annual_allowance/minimum.yaml

@@ -1,11 +1,18 @@
-description: Minimum annual allowance for relief on pension contributions.
+description: Minimum tapered annual allowance for pension input amounts.
 values:
-  2015-04-01: 4_000
+  2016-04-06: 10_000
+  2020-04-06: 4_000
   2023-04-06: 10_000
 metadata:
   unit: currency-GBP
   label: Minimum annual allowance for pension contributions
   reference:
+  - title: Finance (No. 2) Act 2015 Schedule 4 paragraph 10
+    href: https://www.legislation.gov.uk/ukpga/2015/33/schedule/4/paragraph/10
+  - title: Finance Act 2020 s. 22
+    href: https://www.legislation.gov.uk/ukpga/2020/14/section/22
+  - title: Finance (No. 2) Act 2023 s. 22
+    href: https://www.legislation.gov.uk/ukpga/2023/30/section/22
   - title: Finance Act 2004 s. 228ZA
     href: https://www.legislation.gov.uk/ukpga/2004/12/section/228ZA
   - title: Work out your reduced (tapered) annual allowance

policyengine_uk/parameters/gov/hmrc/income_tax/allowances/annual_allowance/reduction_rate.yaml

@@ -1,9 +1,11 @@
-description: Reduction rate for the annual allowance.
+description: Reduction rate for the annual allowance from 2020-21.
 values:
-  2015-04-01: 0.5
+  2020-04-06: 0.5
 metadata:
   unit: marginal-rate
   label: Annual allowance reduction rate
   reference: 
+  - title: Finance Act 2020 s. 22
+    href: https://www.legislation.gov.uk/ukpga/2020/14/section/22
   - title: Tax on your private pension contributions
     href: https://www.gov.uk/tax-on-your-private-pension/annual-allowance

policyengine_uk/parameters/gov/hmrc/income_tax/allowances/annual_allowance/taper.yaml

@@ -1,11 +1,18 @@
-description: Adjusted net income limit for tapering of the annual allowance.
+description: Adjusted income limit for tapering of the pension annual allowance.
 values:
-  2015-04-01: 240_000
+  2016-04-06: 150_000
+  2020-04-06: 240_000
   2023-04-06: 260_000
 metadata:
   unit: currency-GBP
   label: Annual allowance taper threshold
   reference:
+  - title: Finance (No. 2) Act 2015 Schedule 4 paragraph 10
+    href: https://www.legislation.gov.uk/ukpga/2015/33/schedule/4/paragraph/10
+  - title: Finance Act 2020 s. 22
+    href: https://www.legislation.gov.uk/ukpga/2020/14/section/22
+  - title: Finance (No. 2) Act 2023 s. 22
+    href: https://www.legislation.gov.uk/ukpga/2023/30/section/22
   - title: Finance Act 2004 s. 228ZA
     href: https://www.legislation.gov.uk/ukpga/2004/12/section/228ZA
   - title: Tax on your private pension contributions

policyengine_uk/parameters/gov/hmrc/income_tax/allowances/annual_allowance/taper_income_range.yaml

@@ -0,0 +1,9 @@
+description: Adjusted income range over which the pension annual allowance falls from its standard amount to its minimum before 2020-21.
+values:
+  2016-04-06: 60_000
+metadata:
+  unit: currency-GBP
+  label: Pension annual allowance taper income range before 2020
+  reference:
+  - title: Finance (No. 2) Act 2015 Schedule 4 paragraph 10
+    href: https://www.legislation.gov.uk/ukpga/2015/33/schedule/4/paragraph/10

policyengine_uk/tests/policy/baseline/gov/hmrc/income_tax/pension_adjusted_net_income.yaml

@@ -135,6 +135,8 @@
   output:
     net_income: 340_000
     adjusted_net_income: 330_000
-    pension_annual_allowance: 20_000
-    # £40,000 contributions less £20,000 AA, charged at 45%.
-    personal_pension_contributions_tax: 9_000
+    # Statutory adjusted income is £370,000 including employer contributions;
+    # threshold income is £330,000. The taper reaches the £10,000 floor.
+    pension_annual_allowance: 10_000
+    # £40,000 contributions less £10,000 AA, charged at 45%.
+    personal_pension_contributions_tax: 13_500