Disregard allowable employment expenses in Universal Credit earnings

[juaristi22]

Refs #1997. This implements the employment-expenses part; payroll giving and any remaining work stay open.

UC employed earnings currently omit the existing employment_expenses input even though it reduces taxable employment income. Deduct that specific input before adding separately calculated trading earnings. In the natural 2024 single-claimant test, £6,000 earnings and £600 allowable expenses now produce £5,400 UC earnings and £330 more annual UC. Existing tax/NI and pension deductions, trade floors, statutory pay, MIF, claimant aggregation and supplied-output overrides are preserved.

The input represents expenses already allowed under ITEPA Part 5 Chapter 2, after the relevant-employment and combined-deduction restrictions in Chapter 1. Reimbursements qualify only to the extent included in employment earnings; callers must avoid duplicate costs. The input metadata and UC documentation explain this contract. No raw-cost admissibility engine or general salary cap is added. The disregard follows GB regulation 55(3)(a) and its NI counterpart; this validation does not certify every historical commencement or payment-timing case.

Reproducer: policyengine_uk/tests/test_uc_employment_expenses.py::test_allowable_expenses_increase_natural_final_uc_cash

Validation: 151 distinct relevant tests passed across implementation and targeted runs, with unchanged cases carried forward after a fixture correction. Independent captured-head CODE/POLICY review is complete with no findings or material gaps; its 74 fresh tests overlap the implementation results. Formatting, lint, structure/protected-payload checks, the trusted base fix-evidence checker and a notebook HTML build without execution passed. All 807 existing parameter YAML files remain unchanged. Local Python 3.13/Core 3.32.27/microdf 1.2.1 differs from the lock; the full suite, private data, population impacts and encoded parity were not tested. Hosted CI remains to be checked.

The notebook is also touched by #1837 and #1999 in different sections. Preserve those edits when coordinating landing; #1999's downstream earnings-measure work remains separate.

Axiom: needed. The statutory UC expense disregard needs a supported encoding/parity follow-up; no encoding result is claimed.

[vahid-ahmadi]

Fine once expenses can no longer push employed earnings below nil.

@juaristi22, the change follows UC Regs 2013 reg 55(3)(a), which disregards expenses allowed under ITEPA Part 5 Chapter 2. I hand-checked the main case. The 2024 single standard allowance is £4,721.40. Then 4,721.40 − 0.55 × 5,400 = £1,751.40, and the gain against the case with no expenses is 0.55 × 600 = £330.

1. should: uc_individual_earned_income_before_mif.py:106-121. employed is not floored before it is added to self_employed, so expenses above employment income now reduce self-employed earnings. With 2025 inputs of £1,000 employment income, £3,000 employment_expenses and £10,000 self-employment income, taxable_employment_income is £0, but UC earned income is £8,000 instead of £10,000. ITEPA s.329(1) says a Part 5 deduction "may not exceed the earnings from which it is deductible", and taxable_employment_income already floors at nil. Cap the expenses at the employment earnings, or floor employed at nil before adding the trade figure.
2. should: employment_expenses is not only a household-calculator input. policyengine-uk-data imputes it onto the FRS from the SPI (datasets/imputations/income.py:38, employment_expenses="EPB"). So this changes population UC results, not only the household cases in the tests. The PR body says population impacts were not tested. A one-line estimate in the PR, or a note in the changelog that microsimulation results move, would help whoever reviews the data release. Point 1 matters more here, because imputed values are not bound by s.329.
3. nit: the UC reg 55(3)(a) reference reuses the same URL as the existing reg 55(4)/(5) entry. One entry titled "reg. 55(3)(a), (4) and (5)" would do.

What I checked

• Read the full diff and issue #1997. Read reg 55 on legislation.gov.uk and ITEPA s.329.
• policyengine-core test uc_employment_expenses.yaml: 2 passed. pytest test_uc_employment_expenses.py: 16 passed. All of tests/policy/baseline/finance/benefit/family/universal_credit: 484 passed.
• Reverted the UC formula. The new YAML then fails 1 of 2, and the new pytest file fails 12 of 16.
• Ran the over-deduction household above, on this head.
• ruff check and ruff format --check on the changed Python files: clean.
• Hosted CI on this head: all green.
• Not checked: the notebook render, private-data impacts, and the NI regulations beyond the link.

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