fix: include employer contributions in Annual Allowance calculation (#1503)

* fix: include employer contributions in Annual Allowance calculation

Per Finance Act 2004 s.233, the pension input amount for money purchase
arrangements includes both individual and employer contributions.
Previously only employee + personal contributions were counted, understating
the Annual Allowance tax charge.

Adds pension_contributions_for_annual_allowance variable that sums all
contribution types without modifying pension_contributions (which feeds
means-tested benefit calculations).

Co-Authored-By: Claude Opus 4.6 <noreply@anthropic.com>

* fix: update microsimulation tests for corrected AA calculation

The salary sacrifice income tax test previously expected income tax to
increase with the cap reform, but that was due to the AA bug (excess counted
toward AA in reform but not baseline). Now total pension input for AA is
the same in both scenarios, so the income tax effect is approximately neutral.

Update UC taper rate expected impact from -44.8 to -43.2 to reflect the
baseline shift from employer contributions now counting toward the AA.

Co-Authored-By: Claude Opus 4.6 <noreply@anthropic.com>

* Add changelog entry and use underscore thousands separators in YAML

Co-Authored-By: Claude Opus 4.6 <noreply@anthropic.com>

* fixup! Add changelog entry and use underscore thousands separators in YAML

* Update UC taper reform expected impact for corrected AA parameters

The AA parameter fix (£40k→£60k from 2023-24) shifts the UC taper
reform impact from -43.2bn to -34.6bn, because more pension
contributions now fall within the allowance.

Co-Authored-By: Claude Opus 4.6 <noreply@anthropic.com>

* Fix highest_education KeyError in student loan uprating

The guard added in #1500 only checked for student_loan_plan but
the function also requires highest_education, which is missing
from the current enhanced FRS dataset on HuggingFace.

Co-Authored-By: Claude Opus 4.6 <noreply@anthropic.com>

* Revert UC taper expected impact to -43.2bn

The -34.6bn value was computed locally with monkey-patched student loan
uprating (skipping highest_education). CI uses the actual HF dataset
which lacks highest_education, so student loan uprating is skipped via
the guard, producing a different baseline. The CI-observed value is
still -43.2bn.

Co-Authored-By: Claude Opus 4.6 <noreply@anthropic.com>

---------

Co-authored-by: Claude Opus 4.6 <noreply@anthropic.com>

Author: MaxGhenis

CLAUDE.md

@@ -1,6 +1,10 @@
 # Development Guidelines for PolicyEngine UK
 
-## Build Commands
+## Git workflow
+- **Always branch from `main`**: `git checkout main && git pull origin main && git checkout -b your-branch`
+- Default branch is `main` (not `master`)
+
+## Build commands
 - Install: `make install` or `pip install -e ".[dev]" --config-settings editable_mode=compat`
 - Format code: `make format` or `black . -l 79`
 - Run all tests: `make test`

changelog_entry.yaml

@@ -0,0 +1,4 @@
+- bump: minor
+  changes:
+    fixed:
+      - Include employer pension contributions and salary sacrifice in the Annual Allowance tax charge calculation, per Finance Act 2004 s.233.

policyengine_uk/data/economic_assumptions.py

@@ -245,9 +245,10 @@ def uprate_student_loan_plans(
     For (2) and (3), we use highest_education == TERTIARY as the signal
     for who is a graduate, then apply a flat take-up probability.
     """
-    # Skip if student_loan_plan column doesn't exist yet (e.g., during
+    # Skip if required columns don't exist yet (e.g., during
     # initial dataset creation before imputation runs)
-    if "student_loan_plan" not in current_year.person.columns:
+    required = ("student_loan_plan", "highest_education")
+    if any(col not in current_year.person.columns for col in required):
         return current_year
 
     year = int(current_year.time_period)

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

@@ -1,9 +1,12 @@
 description: Annual allowance for relief on pension contributions
 values:
   2015-04-01: 40_000
+  2023-04-06: 60_000
 metadata:
   unit: currency-GBP
   label: Annual allowance for pension contributions
-  reference: 
+  reference:
+  - title: Finance Act 2004 s. 228
+    href: https://www.legislation.gov.uk/ukpga/2004/12/section/228
   - 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/minimum.yaml

@@ -1,9 +1,12 @@
 description: Minimum annual allowance for relief on pension contributions
 values:
   2015-04-01: 4_000
+  2023-04-06: 10_000
 metadata:
   unit: currency-GBP
   label: Minimum annual allowance for pension contributions
-  reference: 
+  reference:
+  - 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
     href: https://www.gov.uk/guidance/pension-schemes-work-out-your-tapered-annual-allowance

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

@@ -1,9 +1,12 @@
 description: Adjusted net income limit for tapering of the annual allowance
 values:
   2015-04-01: 240_000
+  2023-04-06: 260_000
 metadata:
   unit: currency-GBP
   label: Annual allowance taper threshold
-  reference: 
+  reference:
+  - title: Finance Act 2004 s. 228ZA
+    href: https://www.legislation.gov.uk/ukpga/2004/12/section/228ZA
   - title: Tax on your private pension contributions
     href: https://www.gov.uk/tax-on-your-private-pension/annual-allowance

policyengine_uk/tests/microsimulation/test_salary_sacrifice_cap_reform.py

@@ -151,14 +151,14 @@ def test_income_tax_impact(baseline_simulation, reform_simulation):
     print(f"Reform income tax: £{reform_tax/1e9:.3f}bn")
     print(f"Income tax change: £{tax_change/1e9:.3f}bn")
 
-    # Income tax should increase slightly (due to pension relief caps)
-    # Expected to be around £1-2bn
+    # Income tax change should be small and approximately neutral.
+    # The reform redirects excess salary sacrifice to employee pension
+    # contributions (which get income tax relief), while the total pension
+    # input for Annual Allowance purposes stays the same (no AA charge
+    # difference). Net effect is a small income tax decrease.
     assert (
-        tax_change > 0
-    ), f"Income tax should increase, got £{tax_change/1e9:.3f}bn"
-    assert (
-        tax_change < 3e9
-    ), f"Income tax increase should be <£3bn, got £{tax_change/1e9:.3f}bn"
+        abs(tax_change) < 1e9
+    ), f"Income tax change should be small (<£1bn), got £{tax_change/1e9:.3f}bn"
 
 
 @pytest.mark.microsimulation

policyengine_uk/tests/policy/baseline/gov/hmrc/income_tax/allowances/is_allowance_eligible.yaml

@@ -30,9 +30,11 @@
 - name: Annual Allowance for Pension Contributions
   period: 2024
   input:
-    adjusted_net_income: 60000
-  output: 
-    pension_annual_allowance: 40000.0
+    adjusted_net_income: 60_000
+  output:
+    # AA = £60,000 from 2023-04-06 (FA 2004 s.228, amended by Finance (No. 2) Act 2023)
+    # ANI of £60,000 is below the taper threshold of £260,000, so full AA applies
+    pension_annual_allowance: 60_000
 
 - name: Trading Allowance Deduction
   period: 2024

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

@@ -0,0 +1,79 @@
+# Tests for pension_contributions_for_annual_allowance
+# Per Finance Act 2004 s.233, the pension input amount for money purchase
+# arrangements includes BOTH individual contributions AND employer contributions.
+# https://www.legislation.gov.uk/ukpga/2004/12/section/233
+
+- name: No contributions
+  period: 2024
+  input:
+    employee_pension_contributions_reported: 0
+    personal_pension_contributions: 0
+    employer_pension_contributions: 0
+    pension_contributions_via_salary_sacrifice: 0
+  output:
+    pension_contributions_for_annual_allowance: 0
+
+- name: Employee contributions only
+  period: 2024
+  input:
+    employee_pension_contributions_reported: 5_000
+    personal_pension_contributions: 0
+    employer_pension_contributions: 0
+    pension_contributions_via_salary_sacrifice: 0
+  output:
+    pension_contributions_for_annual_allowance: 5_000
+
+- name: Personal contributions only
+  period: 2024
+  input:
+    employee_pension_contributions_reported: 0
+    personal_pension_contributions: 3_000
+    employer_pension_contributions: 0
+    pension_contributions_via_salary_sacrifice: 0
+  output:
+    pension_contributions_for_annual_allowance: 3_000
+
+- name: Employer contributions only
+  period: 2024
+  input:
+    employee_pension_contributions_reported: 0
+    personal_pension_contributions: 0
+    employer_pension_contributions: 10_000
+    pension_contributions_via_salary_sacrifice: 0
+  output:
+    pension_contributions_for_annual_allowance: 10_000
+
+- name: All contribution types (no salary sacrifice)
+  period: 2024
+  input:
+    employee_pension_contributions_reported: 5_000
+    personal_pension_contributions: 3_000
+    employer_pension_contributions: 10_000
+    pension_contributions_via_salary_sacrifice: 0
+  output:
+    pension_contributions_for_annual_allowance: 18_000
+
+- name: With salary sacrifice (below cap, no excess)
+  period: 2024
+  input:
+    employee_pension_contributions_reported: 5_000
+    personal_pension_contributions: 0
+    employer_pension_contributions: 2_000
+    pension_contributions_via_salary_sacrifice: 8_000
+  output:
+    # employee_pension_contributions = 5_000 + 0 (no excess) = 5_000
+    # pension_contributions_via_salary_sacrifice_adjusted = 8_000 (all below cap)
+    # Total: 5_000 + 0 + 2_000 + 8_000 = 15_000
+    pension_contributions_for_annual_allowance: 15_000
+
+- name: High employer contributions exceeding annual allowance
+  period: 2024
+  input:
+    employee_pension_contributions_reported: 10_000
+    personal_pension_contributions: 5_000
+    employer_pension_contributions: 50_000
+    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)
+    pension_contributions_for_annual_allowance: 65_000

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

@@ -0,0 +1,64 @@
+# Tests for personal_pension_contributions_tax (Annual Allowance charge)
+# Per Finance Act 2004 s.227 and s.233, the annual allowance charge applies
+# to total pension input amounts exceeding the annual allowance.
+# The pension input amount includes employer contributions (s.233(1)(b)).
+# https://www.legislation.gov.uk/ukpga/2004/12/section/227
+# https://www.legislation.gov.uk/ukpga/2004/12/section/233
+#
+# The pension annual allowance is £60,000 from 2023-04-06 (FA 2004 s.228,
+# as amended by Finance (No. 2) Act 2023).
+
+- name: Contributions within annual allowance - no tax charge
+  period: 2024
+  absolute_error_margin: 0.01
+  input:
+    employment_income: 80_000
+    employee_pension_contributions_reported: 10_000
+    personal_pension_contributions: 5_000
+    employer_pension_contributions: 5_000
+  output:
+    # Total for AA: 10_000 + 5_000 + 5_000 = 20_000, below 60_000 AA
+    personal_pension_contributions_tax: 0
+
+- name: Employee-only contributions exceeding AA
+  period: 2024
+  absolute_error_margin: 0.01
+  input:
+    employment_income: 100_000
+    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)
+    # Tax charge: 10_000 * 0.2 = 2_000
+    personal_pension_contributions_tax: 2_000
+
+- name: Employer contributions push total over AA
+  period: 2024
+  absolute_error_margin: 0.01
+  input:
+    employment_income: 100_000
+    employee_pension_contributions_reported: 20_000
+    employer_pension_contributions: 50_000
+  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)
+    # Tax charge: 10_000 * 0.4 = 4_000
+    personal_pension_contributions_tax: 4_000
+
+- name: Only employer contributions exceed AA
+  period: 2024
+  absolute_error_margin: 0.01
+  input:
+    employment_income: 100_000
+    employer_pension_contributions: 70_000
+  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)
+    # Tax charge: 10_000 * 0.4 = 4_000
+    personal_pension_contributions_tax: 4_000