Salary sacrifice pension modeling

changelog_entry.yaml

@@ -0,0 +1,4 @@
+- bump: minor
+  changes:
+    added:
+    - Salary sacrifice pension cap policy modeling (2,000 GBP cap on NI-exempt contributions)

policyengine_uk/parameters/gov/contrib/behavioral_responses/employee_salary_sacrifice_reduction_rate.yaml

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+# The percentage by which employees reduce their salary sacrifice pension contributions in response to the cap.
+# - 0 = no adjustment (employees keep high salary sacrifice and pay NI on excess)
+# - 0.5 = employees reduce salary sacrifice by 50% of the excess above cap
+# - 1.0 = employees fully optimize (reduce salary sacrifice to exactly the cap)
+# Most employees would optimize their salary sacrifice to avoid NI charges by reducing it to the cap level.
+description: The percentage by which employees reduce their salary sacrifice pension contributions in response to the salary sacrifice pension cap.
+values:
+  2010-01-01: 1.0  # Default: full optimization (employees reduce to cap level)
+metadata:
+  unit: /1
+  label: Employee salary sacrifice reduction rate in response to cap
+  reference:
+    - title: "Cap on UK salary sacrifice benefits is 'short-term' choice, warn experts"
+      href: https://docs.google.com/document/d/1Rhrfrg7A_oZHudmA775otAn1EE4-YthgeyS9nL-PrE8/edit?tab=t.0

policyengine_uk/parameters/gov/hmrc/national_insurance/salary_sacrifice_pension_cap.yaml

@@ -0,0 +1,13 @@
+# The annual cap on salary sacrifice pension contributions that are exempt from NI.
+# Contributions above this cap are subject to standard NI rates.
+# When set to infinity (default), the scheme is inactive and all salary sacrifice remains exempt from NI.
+description: The annual cap on salary sacrifice pension contributions that are exempt from employee and employer National Insurance contributions.
+values:
+  2010-01-01: .inf  # Default: no cap (scheme inactive)
+metadata:
+  unit: currency-GBP
+  label: Salary sacrifice pension NI exemption cap
+  period: year
+  reference:
+    - title: "Cap on UK salary sacrifice benefits is 'short-term' choice, warn experts"
+      href: https://docs.google.com/document/d/1Rhrfrg7A_oZHudmA775otAn1EE4-YthgeyS9nL-PrE8/edit?tab=t.0

policyengine_uk/tests/policy/baseline/gov/hmrc/national_insurance/salary_sacrifice_pension_ni_employee.yaml

@@ -0,0 +1,89 @@
+- name: No employee NI charge when salary sacrifice below £2,000 cap
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    employment_income: 40_000
+    pension_contributions_via_salary_sacrifice: 1_500
+    gov.hmrc.national_insurance.salary_sacrifice_pension_cap: 2_000
+    gov.contrib.behavioral_responses.employee_salary_sacrifice_reduction_rate: 0
+  output:
+    salary_sacrifice_pension_ni_employee: 0
+
+- name: Employee NI charge at 8% main rate for moderate earner above cap
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    employment_income: 45_000
+    pension_contributions_via_salary_sacrifice: 2_250
+    gov.hmrc.national_insurance.salary_sacrifice_pension_cap: 2_000
+    gov.contrib.behavioral_responses.employee_salary_sacrifice_reduction_rate: 0
+  output:
+    salary_sacrifice_pension_ni_employee: (2_250 - 2_000) * 0.08  # £250 excess * 8%
+
+- name: Employee NI charge at 8% main rate for earner just below UEL
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    employment_income: 50_000
+    pension_contributions_via_salary_sacrifice: 10_000
+    gov.hmrc.national_insurance.salary_sacrifice_pension_cap: 2_000
+    gov.contrib.behavioral_responses.employee_salary_sacrifice_reduction_rate: 0
+  output:
+    salary_sacrifice_pension_ni_employee: (10_000 - 2_000) * 0.08  # £8,000 excess * 8%
+
+- name: Employee NI charge at 2% additional rate for high earner above UEL
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    employment_income: 125_000
+    pension_contributions_via_salary_sacrifice: 25_000
+    gov.hmrc.national_insurance.salary_sacrifice_pension_cap: 2_000
+    gov.contrib.behavioral_responses.employee_salary_sacrifice_reduction_rate: 0
+  output:
+    salary_sacrifice_pension_ni_employee: (25_000 - 2_000) * 0.02  # £23,000 excess * 2%
+
+- name: Employee NI charge at 2% for earner well above UEL
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    employment_income: 80_000
+    pension_contributions_via_salary_sacrifice: 5_000
+    gov.hmrc.national_insurance.salary_sacrifice_pension_cap: 2_000
+    gov.contrib.behavioral_responses.employee_salary_sacrifice_reduction_rate: 0
+  output:
+    salary_sacrifice_pension_ni_employee: (5_000 - 2_000) * 0.02  # £3,000 excess * 2%
+
+- name: No employee NI charge when exactly at cap
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    employment_income: 60_000
+    pension_contributions_via_salary_sacrifice: 2_000
+    gov.hmrc.national_insurance.salary_sacrifice_pension_cap: 2_000
+    gov.contrib.behavioral_responses.employee_salary_sacrifice_reduction_rate: 0
+  output:
+    salary_sacrifice_pension_ni_employee: 0
+
+- name: Employee NI charge for small excess over cap
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    employment_income: 35_000
+    pension_contributions_via_salary_sacrifice: 2_100
+    gov.hmrc.national_insurance.salary_sacrifice_pension_cap: 2_000
+    gov.contrib.behavioral_responses.employee_salary_sacrifice_reduction_rate: 0
+  output:
+    salary_sacrifice_pension_ni_employee: 100 * 0.08  # £100 excess * 8%
+
+- name: Employee optimizes salary sacrifice to cap (100% behavioral response)
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    employment_income: 45_000
+    pension_contributions_via_salary_sacrifice: 3_000
+    gov.hmrc.national_insurance.salary_sacrifice_pension_cap: 2_000
+    gov.contrib.behavioral_responses.employee_salary_sacrifice_reduction_rate: 1.0
+  output:
+    salary_sacrifice_pension_ni_employee: 0
+    pension_contributions_via_salary_sacrifice_adjusted: 2_000
+    salary_sacrifice_returned_to_income: 1_000

policyengine_uk/tests/policy/baseline/gov/hmrc/national_insurance/salary_sacrifice_pension_ni_employer.yaml

@@ -0,0 +1,88 @@
+- name: No employer NI charge when salary sacrifice below £2,000 cap
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    employment_income: 40_000
+    pension_contributions_via_salary_sacrifice: 1_500
+    gov.hmrc.national_insurance.salary_sacrifice_pension_cap: 2_000
+    gov.contrib.behavioral_responses.employee_salary_sacrifice_reduction_rate: 0
+  output:
+    salary_sacrifice_pension_ni_employer: 0
+
+- name: Employer NI charge at 15% for moderate earner above cap
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    employment_income: 45_000
+    pension_contributions_via_salary_sacrifice: 2_250
+    gov.hmrc.national_insurance.salary_sacrifice_pension_cap: 2_000
+    gov.contrib.behavioral_responses.employee_salary_sacrifice_reduction_rate: 0
+  output:
+    salary_sacrifice_pension_ni_employer: (2_250 - 2_000) * 0.15  # £250 excess * 15%
+
+- name: Employer NI charge at 15% for high earner with large excess
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    employment_income: 125_000
+    pension_contributions_via_salary_sacrifice: 25_000
+    gov.hmrc.national_insurance.salary_sacrifice_pension_cap: 2_000
+    gov.contrib.behavioral_responses.employee_salary_sacrifice_reduction_rate: 0
+  output:
+    salary_sacrifice_pension_ni_employer: (25_000 - 2_000) * 0.15  # £23,000 excess * 15%
+
+- name: Employer NI charge for large salary sacrifice
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    employment_income: 80_000
+    pension_contributions_via_salary_sacrifice: 15_000
+    gov.hmrc.national_insurance.salary_sacrifice_pension_cap: 2_000
+    gov.contrib.behavioral_responses.employee_salary_sacrifice_reduction_rate: 0
+  output:
+    salary_sacrifice_pension_ni_employer: (15_000 - 2_000) * 0.15  # £13,000 excess * 15%
+
+- name: No employer NI charge when exactly at cap
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    employment_income: 60_000
+    pension_contributions_via_salary_sacrifice: 2_000
+    gov.hmrc.national_insurance.salary_sacrifice_pension_cap: 2_000
+    gov.contrib.behavioral_responses.employee_salary_sacrifice_reduction_rate: 0
+  output:
+    salary_sacrifice_pension_ni_employer: 0
+
+- name: Employer NI charge for small excess over cap
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    employment_income: 35_000
+    pension_contributions_via_salary_sacrifice: 2_100
+    gov.hmrc.national_insurance.salary_sacrifice_pension_cap: 2_000
+    gov.contrib.behavioral_responses.employee_salary_sacrifice_reduction_rate: 0
+  output:
+    salary_sacrifice_pension_ni_employer: 100 * 0.15  # £100 excess * 15%
+
+- name: Employer NI charge for low earner with high pension contribution
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    employment_income: 30_000
+    pension_contributions_via_salary_sacrifice: 5_000
+    gov.hmrc.national_insurance.salary_sacrifice_pension_cap: 2_000
+    gov.contrib.behavioral_responses.employee_salary_sacrifice_reduction_rate: 0
+  output:
+    salary_sacrifice_pension_ni_employer: (5_000 - 2_000) * 0.15  # £3,000 excess * 15%
+
+- name: No employer NI charge when employee optimizes (100% behavioral response)
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    employment_income: 45_000
+    pension_contributions_via_salary_sacrifice: 3_000
+    gov.hmrc.national_insurance.salary_sacrifice_pension_cap: 2_000
+    gov.contrib.behavioral_responses.employee_salary_sacrifice_reduction_rate: 1.0
+  output:
+    salary_sacrifice_pension_ni_employer: 0
+    pension_contributions_via_salary_sacrifice_adjusted: 2_000

policyengine_uk/variables/gov/hmrc/national_insurance/national_insurance.py

@@ -14,4 +14,5 @@ class national_insurance(Variable):
         "ni_class_2",
         "ni_class_3",
         "ni_class_4",
+        "salary_sacrifice_pension_ni_employee",
     ]

policyengine_uk/variables/gov/hmrc/national_insurance/salary_sacrifice_pension_ni_employee.py

@@ -0,0 +1,49 @@
+from policyengine_uk.model_api import *
+
+
+class salary_sacrifice_pension_ni_employee(Variable):
+    label = "Employee NI on salary sacrifice pension contributions above cap"
+    documentation = (
+        "Additional employee National Insurance contributions due to "
+        "salary sacrifice pension contributions exceeding the £2,000 cap. "
+        "The excess is subject to standard NI rates: the main rate for "
+        "earnings below the Upper Earnings Limit, and the additional rate "
+        "for earnings above it."
+    )
+    entity = Person
+    definition_period = YEAR
+    value_type = float
+    unit = GBP
+    reference = "https://docs.google.com/document/d/1Rhrfrg7A_oZHudmA775otAn1EE4-YthgeyS9nL-PrE8/edit?tab=t.0"
+
+    def formula(person, period, parameters):
+        # Use adjusted salary sacrifice after behavioral response
+        ss_contributions = person(
+            "pension_contributions_via_salary_sacrifice_adjusted", period
+        )
+        cap = parameters(
+            period
+        ).gov.hmrc.national_insurance.salary_sacrifice_pension_cap
+
+        # If cap is infinite, scheme is inactive (no charge)
+        if np.isinf(cap):
+            return 0
+
+        excess = max_(ss_contributions - cap, 0)
+
+        # Use existing NI Class 1 parameters
+        ni_params = parameters(period).gov.hmrc.national_insurance.class_1
+        employment_income = person("employment_income", period)
+        upper_earnings_limit = (
+            ni_params.thresholds.upper_earnings_limit * WEEKS_IN_YEAR
+        )
+
+        # Apply appropriate NI rate based on income level
+        # Main rate (8%) for income ≤ UEL, additional rate (2%) for income > UEL
+        ni_rate = where(
+            employment_income <= upper_earnings_limit,
+            ni_params.rates.employee.main,
+            ni_params.rates.employee.additional,
+        )
+
+        return excess * ni_rate

policyengine_uk/variables/gov/hmrc/national_insurance/salary_sacrifice_pension_ni_employer.py

@@ -0,0 +1,36 @@
+from policyengine_uk.model_api import *
+
+
+class salary_sacrifice_pension_ni_employer(Variable):
+    label = "Employer NI on salary sacrifice pension contributions above cap"
+    documentation = (
+        "Additional employer National Insurance contributions due to "
+        "salary sacrifice pension contributions exceeding the £2,000 cap. "
+        "The excess is subject to the standard employer NI rate of 15%."
+    )
+    entity = Person
+    definition_period = YEAR
+    value_type = float
+    unit = GBP
+    reference = "https://docs.google.com/document/d/1Rhrfrg7A_oZHudmA775otAn1EE4-YthgeyS9nL-PrE8/edit?tab=t.0"
+
+    def formula(person, period, parameters):
+        # Use adjusted salary sacrifice after behavioral response
+        ss_contributions = person(
+            "pension_contributions_via_salary_sacrifice_adjusted", period
+        )
+        cap = parameters(
+            period
+        ).gov.hmrc.national_insurance.salary_sacrifice_pension_cap
+
+        # If cap is infinite, scheme is inactive (no charge)
+        if np.isinf(cap):
+            return 0
+
+        excess = max_(ss_contributions - cap, 0)
+
+        # Use existing NI Class 1 employer rate parameter
+        ni_params = parameters(period).gov.hmrc.national_insurance.class_1
+        employer_rate = ni_params.rates.employer
+
+        return excess * employer_rate

policyengine_uk/variables/gov/hmrc/national_insurance/total_national_insurance.py

@@ -11,4 +11,5 @@ class total_national_insurance(Variable):
     adds = [
         "national_insurance",
         "ni_class_1_employer",
+        "salary_sacrifice_pension_ni_employer",
     ]

policyengine_uk/variables/gov/hmrc/pensions/pension_contributions_via_salary_sacrifice_adjusted.py

@@ -0,0 +1,43 @@
+from policyengine_uk.model_api import *
+
+
+class pension_contributions_via_salary_sacrifice_adjusted(Variable):
+    label = "Adjusted salary sacrifice pension contributions after behavioral response"
+    documentation = (
+        "The actual amount of salary sacrifice pension contributions after employees "
+        "adjust their behavior in response to the salary sacrifice cap. When the cap "
+        "is active and employees face NI charges on excess contributions, they may "
+        "reduce their salary sacrifice to the cap level. The reduction rate is "
+        "controlled by the employee_salary_sacrifice_reduction_rate parameter."
+    )
+    entity = Person
+    definition_period = YEAR
+    value_type = float
+    unit = GBP
+    reference = "https://docs.google.com/document/d/1Rhrfrg7A_oZHudmA775otAn1EE4-YthgeyS9nL-PrE8/edit?tab=t.0"
+
+    def formula(person, period, parameters):
+        intended_ss = person(
+            "pension_contributions_via_salary_sacrifice", period
+        )
+        cap = parameters(
+            period
+        ).gov.hmrc.national_insurance.salary_sacrifice_pension_cap
+
+        # If cap is infinite, no adjustment needed
+        if np.isinf(cap):
+            return intended_ss
+
+        # Calculate excess above cap
+        excess = max_(intended_ss - cap, 0)
+
+        # Get behavioral response rate
+        reduction_rate = parameters(
+            period
+        ).gov.contrib.behavioral_responses.employee_salary_sacrifice_reduction_rate
+
+        # Amount employee reduces their salary sacrifice
+        reduction = excess * reduction_rate
+
+        # Adjusted salary sacrifice
+        return intended_ss - reduction

policyengine_uk/variables/gov/hmrc/pensions/salary_sacrifice_returned_to_income.py

@@ -0,0 +1,26 @@
+from policyengine_uk.model_api import *
+
+
+class salary_sacrifice_returned_to_income(Variable):
+    label = "Amount of salary sacrifice returned to employment income"
+    documentation = (
+        "The amount of salary sacrifice that is returned to regular employment income "
+        "when employees reduce their salary sacrifice in response to the pension cap. "
+        "This amount becomes subject to regular income tax and NI as employment income."
+    )
+    entity = Person
+    definition_period = YEAR
+    value_type = float
+    unit = GBP
+    reference = "https://docs.google.com/document/d/1Rhrfrg7A_oZHudmA775otAn1EE4-YthgeyS9nL-PrE8/edit?tab=t.0"
+
+    def formula(person, period, parameters):
+        intended_ss = person(
+            "pension_contributions_via_salary_sacrifice", period
+        )
+        adjusted_ss = person(
+            "pension_contributions_via_salary_sacrifice_adjusted", period
+        )
+
+        # The difference is returned to employment income
+        return intended_ss - adjusted_ss

policyengine_uk/variables/input/consumption/property/pension_contributions_via_salary_sacrifice.py

@@ -0,0 +1,16 @@
+from policyengine_uk.model_api import *
+
+
+class pension_contributions_via_salary_sacrifice(Variable):
+    label = "Pension contributions via salary sacrifice"
+    documentation = (
+        "Annual amount of pension contributions made through salary sacrifice "
+        "arrangements, where the employee agrees to reduce their gross salary "
+        "in exchange for employer pension contributions"
+    )
+    entity = Person
+    definition_period = YEAR
+    value_type = float
+    unit = GBP
+    reference = "https://datacatalogue.ukdataservice.ac.uk/datasets/dataset/630d4a8d-ba6a-82b3-f33d-c713c66efcb3"
+    uprating = "gov.economic_assumptions.indices.obr.average_earnings"