Fix UC rebalancing protection for existing claimants

Author: MaxGhenis

changelog.d/uc-rebalancing-protection.fixed.md

@@ -0,0 +1 @@
+Corrected Universal Credit rebalancing so existing health-element claimants keep their combined award CPI-protected and single claimants under 25 receive the matching standard allowance top-up.

docs/book/policy/model-baseline.md

@@ -12,7 +12,7 @@ The government increased the [employer National Insurance rate from 13.8% to 15%
 
 ### Universal Credit rebalancing
 
-Parliament passed legislation to implement Universal Credit rebalancing reforms, with the [rebalancing switch activated in fiscal year 2025-26](https://github.com/PolicyEngine/policyengine-uk/blob/master/policyengine_uk/parameters/gov/dwp/universal_credit/rebalancing/active.yaml#L3). The reforms include [graduated standard allowance uplifts](https://github.com/PolicyEngine/policyengine-uk/blob/master/policyengine_uk/parameters/gov/dwp/universal_credit/rebalancing/standard_allowance_uplift.yaml) above inflation: 2.3% in 2026-27, 3.1% in 2027-28, 4.0% in 2028-29, and 4.8% in 2029-30. A [new health element of £217.26](https://github.com/PolicyEngine/policyengine-uk/blob/master/policyengine_uk/parameters/gov/dwp/universal_credit/rebalancing/new_claimant_health_element.yaml#L3) will be introduced for new claimants in fiscal year 2026-27.
+Parliament passed legislation to implement Universal Credit rebalancing reforms, with the [rebalancing switch activated in fiscal year 2025-26](https://github.com/PolicyEngine/policyengine-uk/blob/master/policyengine_uk/parameters/gov/dwp/universal_credit/rebalancing/active.yaml#L3). The reforms include [graduated standard allowance uplifts](https://github.com/PolicyEngine/policyengine-uk/blob/master/policyengine_uk/parameters/gov/dwp/universal_credit/rebalancing/standard_allowance_uplift.yaml) above inflation: 2.3% in 2026-27, 3.1% in 2027-28, 4.0% in 2028-29, and 4.8% in 2029-30. A [new health element of £217.26](https://github.com/PolicyEngine/policyengine-uk/blob/master/policyengine_uk/parameters/gov/dwp/universal_credit/rebalancing/new_claimant_health_element.yaml#L3) applies to most new claimants in fiscal year 2026-27, while existing health-element claimants keep the combined value of their standard allowance and health element at least in line with CPI. Single claimants under 25 receive an additional standard allowance top-up to preserve that protection.
 
 ### Benefit uprating
 
@@ -113,4 +113,4 @@ Notable exclusions:
 - **Non-UK resident stamp duty surcharge**: 2% additional rate from fiscal year 2021-22 is not modelled
 - **Some devolved tax policies**: Beyond property transaction taxes, other devolved policies may have limited coverage
 
-All parameter values include references to primary legislation and can be found in the [PolicyEngine UK parameters directory](https://github.com/PolicyEngine/policyengine-uk/tree/master/policyengine_uk/parameters).
+All parameter values include references to primary legislation and can be found in the [PolicyEngine UK parameters directory](https://github.com/PolicyEngine/policyengine-uk/tree/master/policyengine_uk/parameters).

docs/book/policy/uc-rebalancing.md

@@ -7,16 +7,25 @@ The Universal Credit rebalancing reforms represent changes to Universal Credit p
 ## Overview
 
 ```{important}
-The reforms consist of two main components: health element changes for new claimants and standard allowance uplifts.
+The reforms combine a higher standard allowance, protected awards for existing health-element recipients, and a lower fixed health element for most new claimants.
 ```
 
-1. **Health element changes for new claimants**: New Universal Credit claimants from April 2026 onwards receive a fixed health element amount, while existing claimants continue to receive inflation-linked increases.
+1. **Protected awards for existing claimants**: Existing recipients of the health element keep the combined value of their standard allowance and health element at least in line with CPI inflation through 2029-30.
 
-2. **Standard allowance uplifts**: The standard allowance receives additional uplifts beyond the annual inflationary increase from 2026-2029.
+2. **Health element changes for new claimants**: New Universal Credit claimants from April 2026 onwards receive a fixed monthly health element amount of £217.26, rather than the protected existing-claimant amount.
+
+3. **Standard allowance uplifts**: The standard allowance receives additional uplifts beyond the annual inflationary increase from 2026-2029. Single claimants under 25 receive a further top-up so their protected combined award also keeps pace with inflation.
 
 ## Health element changes
 
-From April 2026, new Universal Credit claimants who qualify for the Limited Capacity for Work-Related Activity (LCWRA) element receive a fixed monthly amount of £217.26, rather than the inflation-adjusted amount that pre-2026 claimants continue to receive.
+From April 2026, new Universal Credit claimants who qualify for the Limited Capability for Work-Related Activity (LCWRA) element receive a fixed monthly amount of £217.26.
+
+Existing recipients are treated differently. Their LCWRA amount is uprated so that the combined value of:
+
+- the single-over-25 standard allowance, and
+- the health element
+
+rises at least in line with CPI inflation. Because that flat protected health element is calibrated against the single-over-25 rate, single claimants under 25 receive an additional standard allowance top-up to preserve the same real-terms protection.
 
 The implementation uses transition probabilities based on WPI Economics analysis for the Trussell Trust, derived from administrative Personal Independence Payment data. The probability of being a new claimant varies by year:
 
@@ -34,7 +43,7 @@ The standard allowance receives additional percentage uplifts beyond the normal
 - 2028: 4.0% additional uplift (cumulative)
 - 2029: 4.8% additional uplift (cumulative)
 
-These uplifts are applied to the previous year's standard allowance amount and compound over time.
+These uplifts are applied to the CPI-uprated standard allowance for each year. In other words, the model first applies the usual CPI uprating and then applies the rebalancing uplift on top.
 
 ## Implementation
 
@@ -43,7 +52,7 @@ The reforms are implemented through parameters, scenario modifiers, and scenario
 ```
 
 - **Parameters**: Three YAML files define the reform's activation status, health element amount for new claimants, and standard allowance uplift rates.
-- **Scenario modifier**: The `add_universal_credit_reform` function applies the changes to Universal Credit calculations during microsimulation.
+- **Scenario modifier**: The `add_universal_credit_reform` function applies the protected existing-claimant health-element path and the single-under-25 top-up during microsimulation.
 - **Scenario**: The `universal_credit_july_2025_reform` scenario enables the reforms in policy analysis.
 
 ## Examples
@@ -98,4 +107,8 @@ sim = Simulation(scenario=scenario)
 
 ## Legislative reference
 
-The reforms are based on provisions in the Universal Credit Bill, available at: https://bills.parliament.uk/publications/62123/documents/6889.
+The reforms are based on the Universal Credit Bill and its impact assessment:
+
+- https://bills.parliament.uk/publications/62123/documents/6889
+- https://bills.parliament.uk/publications/62124/documents/6892
+- https://assets.publishing.service.gov.uk/media/689ca49e1c63de6de5bb1298/withdrawn-universal-credit-bill-uc-rebalancing-impact-assessment.pdf

docs/book/usage/scenarios.md

@@ -391,14 +391,14 @@ for year in [2025, 2027, 2029]:
 
 ### Building Universal Credit scenarios with dynamic changes
 
-Some scenarios need to make changes that depend on the simulation's own data. Here's how to create a UC scenario that adjusts payments based on claimant characteristics:
+Some scenarios need to make changes that depend on the simulation's own data. Here's how to create a UC scenario that adjusts health-element payments based on claimant characteristics:
 
 ```python
 from policyengine_uk import Scenario, Microsimulation
 import numpy as np
 
 def modify_uc_for_new_claimants(sim: Microsimulation):
-    """Reduce health elements for new UC claimants while increasing standard allowances"""
+    """Reduce health elements for new UC claimants while preserving claimant protections"""
     # Access the parameter system to check if reforms are active
     rebalancing_params = sim.tax_benefit_system.parameters.gov.dwp.universal_credit.rebalancing
 
@@ -434,11 +434,9 @@ def modify_uc_for_new_claimants(sim: Microsimulation):
 
         sim.set_input("uc_LCWRA_element", year, current_health_element)
 
-        # Increase standard allowances for everyone
-        uplift_rate = rebalancing_params.standard_allowance_uplift(year)
-        previous_allowance = sim.calculate("uc_standard_allowance", year - 1)
-        new_allowance = previous_allowance * (1 + uplift_rate)
-        sim.set_input("uc_standard_allowance", year, new_allowance)
+        # General standard allowance uplifts are already handled in the
+        # uc_standard_allowance formula. Scenario modifiers only need to add
+        # claimant-specific overrides such as protected top-ups.
 
 # Create the UC rebalancing scenario
 uc_rebalancing = Scenario(simulation_modifier=modify_uc_for_new_claimants)

policyengine_uk/scenarios/uc_reform.py

@@ -1,15 +1,73 @@
 from policyengine_uk.model_api import Scenario
 from policyengine_uk import Microsimulation
+from policyengine_uk.variables.gov.dwp.universal_credit.standard_allowance.uc_standard_allowance_claimant_type import (
+    UCClaimantType,
+)
 import numpy as np
 
 
+BASELINE_UC_REBALANCING_YEAR = 2025
+
+
+def _cpi_protected_uc_award_monthly(
+    sim: Microsimulation, year: int, claimant_type: str
+) -> float:
+    parameters = sim.tax_benefit_system.parameters
+    baseline = parameters(str(BASELINE_UC_REBALANCING_YEAR))
+    current = parameters(str(year))
+    cpi_factor = float(current.gov.benefit_uprating_cpi) / float(
+        baseline.gov.benefit_uprating_cpi
+    )
+    baseline_standard_allowance = float(
+        baseline.gov.dwp.universal_credit.standard_allowance.amount[claimant_type]
+    )
+    baseline_health_element = float(
+        baseline.gov.dwp.universal_credit.elements.disabled.amount
+    )
+    return (baseline_standard_allowance + baseline_health_element) * cpi_factor
+
+
+def _rebalanced_standard_allowance_monthly(
+    sim: Microsimulation, year: int, claimant_type: str
+) -> float:
+    current = sim.tax_benefit_system.parameters(str(year))
+    standard_allowance = float(
+        current.gov.dwp.universal_credit.standard_allowance.amount[claimant_type]
+    )
+    uplift = float(
+        current.gov.dwp.universal_credit.rebalancing.standard_allowance_uplift
+    )
+    return standard_allowance * (1 + uplift)
+
+
+def _protected_existing_health_element_monthly(
+    sim: Microsimulation, year: int
+) -> float:
+    return _cpi_protected_uc_award_monthly(
+        sim, year, "SINGLE_OLD"
+    ) - _rebalanced_standard_allowance_monthly(sim, year, "SINGLE_OLD")
+
+
+def _single_young_standard_allowance_topup_monthly(
+    sim: Microsimulation, year: int
+) -> float:
+    protected_young_award = _cpi_protected_uc_award_monthly(sim, year, "SINGLE_YOUNG")
+    standard_allowance = _rebalanced_standard_allowance_monthly(
+        sim, year, "SINGLE_YOUNG"
+    )
+    protected_health_element = _protected_existing_health_element_monthly(sim, year)
+    return max(
+        0.0, protected_young_award - standard_allowance - protected_health_element
+    )
+
+
 def add_universal_credit_reform(sim: Microsimulation):
     rebalancing = sim.tax_benefit_system.parameters.gov.dwp.universal_credit.rebalancing
 
     generator = np.random.default_rng(43)
 
     uc_seed = generator.random(len(sim.calculate("benunit_id")))
-    p_uc_post_2026_status = {
+    post_2025_claimant_share = {
         2025: 0,
         2026: 0.11,
         2027: 0.13,
@@ -20,11 +78,29 @@ def add_universal_credit_reform(sim: Microsimulation):
     for year in range(2026, 2030):
         if not rebalancing.active(year):
             continue
-        is_post_25_claimant = uc_seed < p_uc_post_2026_status[year]
+        is_post_2025_claimant = uc_seed < post_2025_claimant_share[year]
+
+        claimant_type = sim.calculate("uc_standard_allowance_claimant_type", year)
+        current_standard_allowance = sim.calculate("uc_standard_allowance", year)
+        single_young_topup = (
+            _single_young_standard_allowance_topup_monthly(sim, year) * 12
+        )
+        current_standard_allowance[
+            claimant_type == UCClaimantType.SINGLE_YOUNG.name
+        ] += single_young_topup
+        sim.set_input("uc_standard_allowance", year, current_standard_allowance)
+
         current_health_element = sim.calculate("uc_LCWRA_element", year)
-        # Set new claimants to £217.26/month from April 2026 (pre-2026 claimaints keep inflation-linked increases)
+        has_health_element = current_health_element > 0
+        protected_health_element = (
+            _protected_existing_health_element_monthly(sim, year) * 12
+        )
+        current_health_element[has_health_element & ~is_post_2025_claimant] = (
+            protected_health_element
+        )
+        # Set post-April 2026 claimants to £217.26/month.
         # https://bills.parliament.uk/publications/62123/documents/6889#page=16
-        current_health_element[(current_health_element > 0) & is_post_25_claimant] = (
+        current_health_element[has_health_element & is_post_2025_claimant] = (
             new_claimant_health_element(year) * 12
         )  # Monthly amount * 12
         sim.set_input("uc_LCWRA_element", year, current_health_element)

policyengine_uk/tests/test_uc_rebalancing.py

@@ -0,0 +1,115 @@
+import numpy as np
+import pytest
+
+import policyengine_uk.scenarios.uc_reform as uc_reform
+from policyengine_uk import Simulation
+
+BASELINE_YEAR = 2025
+
+
+def _uc_claimant(age: int) -> dict:
+    return {
+        "people": {
+            "person": {
+                "age": {year: age for year in range(2025, 2030)},
+                "employment_income": {year: 0 for year in range(2025, 2030)},
+                "uc_limited_capability_for_WRA": {
+                    year: True for year in range(2025, 2030)
+                },
+            }
+        },
+        "benunits": {"benunit": {"members": ["person"]}},
+        "households": {"household": {"members": ["person"]}},
+    }
+
+
+class _FixedRng:
+    def __init__(self, values):
+        self.values = np.array(values, dtype=float)
+
+    def random(self, size):
+        assert size == len(self.values)
+        return self.values
+
+
+def _force_uc_seed(monkeypatch, values):
+    monkeypatch.setattr(
+        uc_reform.np.random, "default_rng", lambda seed: _FixedRng(values)
+    )
+
+
+def _cpi_protected_uc_award_monthly(
+    sim: Simulation, year: int, claimant_type: str
+) -> float:
+    parameters = sim.tax_benefit_system.parameters
+    baseline = parameters(str(BASELINE_YEAR))
+    current = parameters(str(year))
+    cpi_factor = float(current.gov.benefit_uprating_cpi) / float(
+        baseline.gov.benefit_uprating_cpi
+    )
+    baseline_standard_allowance = float(
+        baseline.gov.dwp.universal_credit.standard_allowance.amount[claimant_type]
+    )
+    baseline_health_element = float(
+        baseline.gov.dwp.universal_credit.elements.disabled.amount
+    )
+    return (baseline_standard_allowance + baseline_health_element) * cpi_factor
+
+
+def _rebalanced_standard_allowance_monthly(
+    sim: Simulation, year: int, claimant_type: str
+) -> float:
+    current = sim.tax_benefit_system.parameters(str(year))
+    return float(
+        current.gov.dwp.universal_credit.standard_allowance.amount[claimant_type]
+    ) * (
+        1
+        + float(current.gov.dwp.universal_credit.rebalancing.standard_allowance_uplift)
+    )
+
+
+def test_existing_single_over_25_claimant_combined_award_tracks_cpi(monkeypatch):
+    _force_uc_seed(monkeypatch, [0.99])
+    sim = Simulation(situation=_uc_claimant(30))
+
+    for year in range(2026, 2030):
+        standard_allowance = sim.calculate("uc_standard_allowance", year)[0] / 12
+        health_element = sim.calculate("uc_LCWRA_element", year)[0] / 12
+        expected_total = _cpi_protected_uc_award_monthly(sim, year, "SINGLE_OLD")
+        expected_health = expected_total - _rebalanced_standard_allowance_monthly(
+            sim, year, "SINGLE_OLD"
+        )
+
+        assert standard_allowance + health_element == pytest.approx(expected_total)
+        assert health_element == pytest.approx(expected_health)
+
+
+def test_existing_single_under_25_claimant_gets_extra_topup(monkeypatch):
+    _force_uc_seed(monkeypatch, [0.99])
+    sim = Simulation(situation=_uc_claimant(22))
+
+    for year in range(2026, 2030):
+        standard_allowance = sim.calculate("uc_standard_allowance", year)[0] / 12
+        health_element = sim.calculate("uc_LCWRA_element", year)[0] / 12
+        expected_total = _cpi_protected_uc_award_monthly(sim, year, "SINGLE_YOUNG")
+        baseline_rebalanced_standard_allowance = _rebalanced_standard_allowance_monthly(
+            sim, year, "SINGLE_YOUNG"
+        )
+
+        assert standard_allowance + health_element == pytest.approx(expected_total)
+        assert standard_allowance > baseline_rebalanced_standard_allowance
+
+
+def test_new_claimants_use_fixed_health_element(monkeypatch):
+    _force_uc_seed(monkeypatch, [0.0])
+    sim = Simulation(situation=_uc_claimant(30))
+
+    for year in range(2026, 2030):
+        health_element = sim.calculate("uc_LCWRA_element", year)[0] / 12
+        expected_health = float(
+            sim.tax_benefit_system.parameters(
+                str(year)
+            ).gov.dwp.universal_credit.rebalancing.new_claimant_health_element
+        )
+
+        assert health_element == pytest.approx(expected_health)