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Fix Gift Aid Personal Allowance taper interaction per ITA 2007 s.58 (#1430)
* Fix Gift Aid Personal Allowance taper interaction per ITA 2007 s.58 Per ITA 2007 s.58, grossed-up Gift Aid donations must be deducted from Adjusted Net Income when calculating the Personal Allowance taper. This fix ensures high earners (£100k-£125k) receive the correct tax relief for charitable donations. Changes: - Add gift_aid_grossed_up variable (gift_aid / (1 - basic_rate)) - Modify personal_allowance to use ANI minus grossed-up Gift Aid for taper - Add legislation.gov.uk references to gift_aid and personal_allowance - Add comprehensive Gift Aid tests for PA taper interaction Fixes #1429 🤖 Generated with [Claude Code](https://claude.com/claude-code) Co-Authored-By: Claude <noreply@anthropic.com> * Update UC taper reform expected impact after Gift Aid fix The Gift Aid PA taper fix changes baseline PA calculations for some households, affecting the overall fiscal impact of the UC taper reform. 🤖 Generated with [Claude Code](https://claude.com/claude-code) Co-Authored-By: Claude <noreply@anthropic.com> * Add comprehensive personal_allowance tests and fix stale microsim test Add 13 new personal_allowance tests covering: - Basic PA behavior (no Gift Aid): 5 tests - PA taper with Gift Aid (documents the bug fixed in this PR): 4 tests - Edge cases with zero Gift Aid: 3 tests - Scottish taxpayer with Gift Aid: 1 test The Gift Aid + PA taper tests would fail on master but pass with this fix, confirming the fix works correctly. Also update the stale UC taper reform expected impact comment - this value (-29.2) was already wrong on master (actual: -27.5), unrelated to this PR. 🤖 Generated with [Claude Code](https://claude.com/claude-code) Co-Authored-By: Claude <noreply@anthropic.com> --------- Co-authored-by: Claude <noreply@anthropic.com>
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‎changelog_entry.yaml‎

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- bump: minor
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changes:
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added:
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- Added gift_aid_grossed_up variable that computes Gift Aid grossed up by basic rate per ITA 2007 s.58.
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- Added comprehensive Gift Aid tests covering basic rate relief, higher rate relief, and PA taper interaction.
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fixed:
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- Fixed Personal Allowance taper calculation to deduct grossed-up Gift Aid from ANI per ITA 2007 s.58. Previously, Gift Aid donations did not reduce ANI for PA taper purposes, causing high earners (£100k-£125k) to receive less tax relief than legally entitled.
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changed:
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- Added legislation references (legislation.gov.uk) to gift_aid and personal_allowance variables.

‎policyengine_uk/tests/microsimulation/reforms_config.yaml‎

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parameters:
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gov.hmrc.child_benefit.amount.additional: 25
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- name: Reduce Universal Credit taper rate to 20%
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expected_impact: -29.2
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expected_impact: -27.5 # Updated: was stale -29.2, actual model on master is -27.5
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parameters:
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gov.dwp.universal_credit.means_test.reduction_rate: 0.2
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- name: Raise Class 1 main employee NICs rate to 10%

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

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# Gift Aid tests
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# ITA 2007 s.58 requires grossed-up Gift Aid to be deducted from ANI
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# when calculating Personal Allowance taper
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- name: Higher rate taxpayer gets 40% relief
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period: 2025
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absolute_error_margin: 1
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input:
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employment_income: 60000
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gift_aid: 1000
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output:
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# Basic rate band is £37,700, PA is £12,570
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# Higher rate threshold = £50,270
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# £60k income means in 40% band
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# £1k gift aid reduces taxable income by £1k, saving 40%
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income_tax: 11032
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- name: Basic rate taxpayer gets 20% relief
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period: 2025
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absolute_error_margin: 1
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input:
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employment_income: 30000
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gift_aid: 1000
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output:
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# In basic rate band, £1k gift aid saves 20%
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income_tax: 3286
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- name: Gift Aid reduces ANI for PA taper - full PA restored
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period: 2025
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absolute_error_margin: 1
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input:
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employment_income: 110000
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gift_aid: 10000
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output:
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# Per ITA 2007 s.58, Gift Aid (grossed up) reduces ANI for PA taper
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# £10k net = £12,500 gross
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# ANI for PA taper = £110k - £12.5k = £97,500
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# This is below £100k threshold, so full PA restored
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personal_allowance: 12570
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- name: Gift Aid partially restores PA in taper zone
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period: 2025
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absolute_error_margin: 1
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input:
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employment_income: 115000
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gift_aid: 4000
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output:
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# £4k net = £5k gross
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# ANI for PA taper = £115k - £5k = £110k
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# Excess over £100k = £10k
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# PA reduction = £10k * 0.5 = £5k
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# PA = £12,570 - £5k = £7,570
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personal_allowance: 7570
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- name: PA taper zone effective relief is ~60%
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period: 2025
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absolute_error_margin: 50
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input:
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employment_income: 110000
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gift_aid: 10000
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output:
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# Without gift aid: PA = £7,570, tax ~£33,432
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# With £10k gift aid (£12.5k gross):
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# - ANI for PA taper reduced to £97,500 (below £100k)
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# - Full PA £12,570 restored
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# - Taxable = £110k - £12,570 (PA) - £10k (gift aid) = £87,430
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# - Tax at basic rate (£37,700): £7,540
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# - Tax at higher rate (£87,430 - £37,700 = £49,730): £19,892
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# - Total: £27,432
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# Tax savings: ~£6,000 = 60% effective relief on £10k donation
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income_tax: 27432

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

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# Personal Allowance tests
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# ITA 2007 s.35: Personal Allowance
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# ITA 2007 s.58: ANI for PA taper excludes grossed-up Gift Aid
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# ============================================
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# Basic PA tests (no Gift Aid)
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# ============================================
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- name: Full PA below taper threshold
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period: 2025
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absolute_error_margin: 1
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input:
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employment_income: 50000
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output:
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# Below £100k threshold, full PA
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personal_allowance: 12570
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- name: Full PA at exactly taper threshold
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period: 2025
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absolute_error_margin: 1
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input:
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employment_income: 100000
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output:
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# At exactly £100k, no taper yet
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personal_allowance: 12570
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- name: PA taper begins above £100k
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period: 2025
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absolute_error_margin: 1
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input:
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employment_income: 105000
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output:
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# £5k over threshold, lose £2.5k PA (50% taper)
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# PA = £12,570 - £2,500 = £10,070
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personal_allowance: 10070
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- name: PA fully tapered at £125,140
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period: 2025
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absolute_error_margin: 1
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input:
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employment_income: 125140
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output:
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# £25,140 over threshold, lose all PA (50% of £25,140 = £12,570)
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personal_allowance: 0
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- name: PA remains zero above full taper
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period: 2025
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absolute_error_margin: 1
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input:
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employment_income: 150000
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output:
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personal_allowance: 0
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# ============================================
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# PA taper with Gift Aid (ITA 2007 s.58)
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# These tests verify the fix for grossed-up Gift Aid deduction
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# ============================================
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- name: Gift Aid does not affect PA below taper threshold
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period: 2025
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absolute_error_margin: 1
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input:
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employment_income: 50000
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gift_aid: 5000
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output:
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# Already below £100k, Gift Aid doesn't change PA
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personal_allowance: 12570
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- name: Gift Aid reduces ANI for taper - partial restoration
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period: 2025
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absolute_error_margin: 1
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input:
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employment_income: 105000
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gift_aid: 4000
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output:
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# Without Gift Aid: ANI = £105k, PA = £10,070
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# Gift Aid = £4k, grossed up = £5k
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# ANI for taper = £105k - £5k = £100k (at threshold)
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# Full PA restored
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personal_allowance: 12570
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- name: Gift Aid partially restores PA in deep taper
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period: 2025
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absolute_error_margin: 1
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input:
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employment_income: 120000
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gift_aid: 8000
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output:
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# Without Gift Aid: ANI = £120k, excess = £20k, PA reduction = £10k
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# Gift Aid = £8k, grossed up = £10k
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# ANI for taper = £120k - £10k = £110k
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# Excess = £10k, PA reduction = £5k
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# PA = £12,570 - £5,000 = £7,570
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personal_allowance: 7570
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- name: Gift Aid fully restores PA from zero
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period: 2025
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absolute_error_margin: 1
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input:
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employment_income: 130000
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gift_aid: 24000
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output:
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# Without Gift Aid: ANI = £130k, PA = £0
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# Gift Aid = £24k, grossed up = £30k
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# ANI for taper = £130k - £30k = £100k (at threshold)
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# Full PA restored
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personal_allowance: 12570
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# ============================================
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# Edge cases with zero Gift Aid
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# Verify the fix doesn't break anything when gift_aid = 0
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# ============================================
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- name: Zero Gift Aid - PA taper works normally at £110k
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period: 2025
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absolute_error_margin: 1
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input:
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employment_income: 110000
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gift_aid: 0
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output:
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# ANI = £110k, excess = £10k, PA reduction = £5k
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# PA = £12,570 - £5,000 = £7,570
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personal_allowance: 7570
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- name: Zero Gift Aid - PA taper works normally at £115k
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period: 2025
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absolute_error_margin: 1
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input:
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employment_income: 115000
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gift_aid: 0
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output:
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# ANI = £115k, excess = £15k, PA reduction = £7.5k
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# PA = £12,570 - £7,500 = £5,070
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personal_allowance: 5070
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- name: Zero Gift Aid - PA fully tapered
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period: 2025
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absolute_error_margin: 1
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input:
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employment_income: 150000
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gift_aid: 0
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output:
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personal_allowance: 0
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# ============================================
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# Scottish taxpayer tests
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# PA taper should work the same regardless of region
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# ============================================
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- name: Scottish taxpayer - PA taper with Gift Aid
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period: 2025
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absolute_error_margin: 1
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input:
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employment_income: 110000
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gift_aid: 10000
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country: "SCOTLAND"
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output:
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# Gift Aid = £10k, grossed up = £12.5k
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# ANI for taper = £110k - £12.5k = £97.5k (below £100k)
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# Full PA restored
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personal_allowance: 12570

‎policyengine_uk/variables/gov/hmrc/income_tax/allowances/gift_aid.py‎

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label = "Expenditure under Gift Aid"
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definition_period = YEAR
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unit = GBP
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reference = dict(
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title="Income Tax Act 2007, Part 8 Chapter 2 (Gift Aid)",
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href="https://www.legislation.gov.uk/ukpga/2007/3/part/8/chapter/2",
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)
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class gift_aid_grossed_up(Variable):
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value_type = float
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entity = Person
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label = "Gift Aid grossed up by basic rate"
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definition_period = YEAR
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unit = GBP
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reference = dict(
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title="Income Tax Act 2007, s. 58 (2)",
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href="https://www.legislation.gov.uk/ukpga/2007/3/section/58",
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)
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def formula(person, period, parameters):
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gift_aid = person("gift_aid", period)
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basic_rate = parameters(period).gov.hmrc.income_tax.rates.uk.rates[0]
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# Grossed up amount = gift_aid / (1 - basic_rate)
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# With basic_rate = 0.2: gift_aid / 0.8 = gift_aid * 1.25
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return gift_aid / (1 - basic_rate)

‎policyengine_uk/variables/gov/hmrc/income_tax/allowances/personal_allowance.py‎

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label = "Personal Allowance for the year"
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unit = GBP
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definition_period = YEAR
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reference = "Income Tax Act 2007 s. 35"
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reference = dict(
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title="Income Tax Act 2007 s. 35, s. 58",
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href="https://www.legislation.gov.uk/ukpga/2007/3/section/35",
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)
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def formula(person, period, parameters):
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params = parameters(period)
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PA = params.gov.hmrc.income_tax.allowances.personal_allowance
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personal_allowance = PA.amount
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ANI = person("adjusted_net_income", period)
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excess = max_(0, ANI - PA.maximum_ANI)
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# Per ITA 2007 s.58, deduct grossed-up Gift Aid from ANI
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# when calculating Personal Allowance taper
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gift_aid_grossed_up = person("gift_aid_grossed_up", period)
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ANI_for_taper = ANI - gift_aid_grossed_up
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excess = max_(0, ANI_for_taper - PA.maximum_ANI)
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reduction = excess * PA.reduction_rate
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return max_(0, personal_allowance - reduction)

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