Set reliefs and allowances against income for the least tax

changelog.d/2106.fixed.md

@@ -0,0 +1 @@
+The model now sets the Personal Allowance, other allowances and trade loss relief against non-savings, savings and dividend income in the way that gives the least tax (ITA 2007 s. 25(2)), and from 2027-28 against other income before property, savings and dividend income (s. 25(3A)), where it previously always took them from non-savings income first. When it compares ways, it counts the Marriage Allowance tax reduction that each wins or loses (s. 55B(2)). Pension relief stays on non-savings income, and the income tax that Universal Credit deducts from earnings still follows the order non-savings, savings, dividends.

policyengine_uk/parameters/gov/hmrc/income_tax/reliefs/other_income_first.yaml

@@ -0,0 +1,14 @@
+description: Income Tax deducts reliefs and allowances from income other than property, savings and dividend income before it deducts them from property, savings or dividend income, and then in the way that gives the least tax.
+values:
+  # Before 2027-28, the taxpayer deducts them under s. 25(2) alone.
+  0000-01-01: false
+  2027-04-06: true
+metadata:
+  unit: bool
+  period: year
+  label: Reliefs and allowances deducted from other income first
+  reference:
+    - title: Income Tax Act 2007 s. 25(2) and (3A)
+      href: https://www.legislation.gov.uk/ukpga/2007/3/section/25
+    - title: Finance Act 2026 s. 6(6) and (8) (s. 25(3A) has effect from 2027-28)
+      href: https://www.legislation.gov.uk/ukpga/2026/11/section/6/enacted

policyengine_uk/reforms/cps/marriage_tax_reforms.py

@@ -95,11 +95,31 @@ def formula(person, period, parameters):
             takes_up = person("would_claim_marriage_allowance", period)
             return eligible * amount_if_eligible * takes_up
 
+    class marriage_allowance_reduction_at_stake(Variable):
+        value_type = float
+        entity = Person
+        label = "Marriage Allowance tax reduction at stake in the share of deductions"
+        documentation = (
+            "Nil for a person who meets the reform's expansion conditions, "
+            "who receives the allowance at any share of reliefs and allowances."
+        )
+        definition_period = YEAR
+        unit = GBP
+
+        def formula(person, period, parameters):
+            return where(
+                person("meets_expanded_ma_conditions", period),
+                0,
+                person("marriage_allowance_appropriate_percentage", period)
+                * person("marriage_allowance_if_income_conditions_met", period),
+            )
+
     class reform(Reform):
         def apply(self):
             self.add_variable(meets_expanded_ma_conditions)
             self.update_variable(meets_marriage_allowance_income_conditions)
             self.update_variable(marriage_allowance)
+            self.update_variable(marriage_allowance_reduction_at_stake)
 
     return reform
 

policyengine_uk/tests/policy/baseline/gov/dwp/legacy_means_tests/income_tax_caused_by_earnings.yaml

@@ -103,14 +103,17 @@
   # A parent aged 35 with one child, pay 40,000 and interest 30,000. Child
   # Benefit 27.05 x 52 = 1,406.60 (1,406 in whole pounds). Adjusted net income
   # 70,000 is half-way through the 60,000 to 80,000 taper: charge 50% x 1,406
-  # = 703 (ITEPA 2003 s.681C). Pay: (40,000 - 12,570) x 20% = 5,486. Interest,
-  # higher-rate (savings allowance 500): 500 at nil, 37,700 - 27,430 - 500 =
-  # 9,770 at 20% = 1,954, 30,000 - 10,270 = 19,730 at 40% = 7,892; 9,846.
-  # Income tax before the winter fuel payment charge: 5,486 + 9,846 + 703 =
-  # 16,035. Without the pay: adjusted net income 30,000, no charge; interest
-  # 17,430 taxable, 5,000 at the starting rate and 1,000 savings allowance at
-  # nil, 11,430 at 20% = 2,286. Tax deducted: 16,035 - 2,286 = 13,749, which
-  # includes the whole 703 charge.
+  # = 703 (ITEPA 2003 s.681C). The least tax sets 2,300 of the personal
+  # allowance against the pay and 10,270 against the interest (ITA 2007
+  # s.25(2)). Pay: 37,700 at 20% = 7,540. Interest, higher-rate (savings
+  # allowance 500): 19,730 above the basic rate limit, 500 at nil and 19,230
+  # at 40% = 7,692. Income tax before the winter fuel payment charge: 7,540 +
+  # 7,692 + 703 = 15,935. Setting the whole allowance against the pay leaves
+  # the 500 at nil in the basic rate band and charges 100 more. Without the
+  # pay: adjusted net income 30,000, no charge; interest 17,430 taxable, 5,000
+  # at the starting rate and 1,000 savings allowance at nil, 11,430 at 20% =
+  # 2,286. Tax deducted: 15,935 - 2,286 = 13,649, which includes the whole 703
+  # charge.
   period: 2026
   absolute_error_margin: 0.01
   input:
@@ -130,10 +133,10 @@
         region: NORTH_EAST
   output:
     CB_HITC: [703, 0]
-    income_tax_before_winter_fuel_payment_charge: [16_035, 0]
-    legacy_means_test_income_tax: [5_486, 0]
+    income_tax_before_winter_fuel_payment_charge: [15_935, 0]
+    legacy_means_test_income_tax: [7_540, 0]
     legacy_means_test_uncounted_income_tax_without_earnings: [2_286, 0]
-    legacy_means_test_deducted_income_tax: [13_749, 0]
+    legacy_means_test_deducted_income_tax: [13_649, 0]
 
 - name: Only the part of the High Income Child Benefit Charge that the pay adds is deducted
   # A parent aged 35 with one child, pay 10,000 and interest 65,000. With the

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

@@ -0,0 +1,76 @@
+# The Marriage Allowance tax reduction the share of reliefs and allowances can
+# win or lose (ITA 2007 ss. 25(2) and 55B). 2026-27: Personal Allowance £12,570,
+# so the transfer reaches 10%, £1,257, rounded up to £1,260 (s. 55B(4) and (5)),
+# and the reduction 20% of that, £252.
+
+- name: A higher-rate earner has the reduction at stake, though the rate test fails
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    people:
+      earner:
+        age: 40
+        employment_income: 60_000
+      partner:
+        age: 40
+    benunit:
+      members: [earner, partner]
+      is_married: true
+  output:
+    marriage_allowance_if_income_conditions_met: [1_260, 0]
+    marriage_allowance_reduction_at_stake: [252, 0]
+    marriage_allowance: [0, 0]
+
+- name: The partner's unused allowance limits the amount at stake
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    people:
+      earner:
+        age: 40
+        employment_income: 30_000
+      partner:
+        age: 40
+        employment_income: 12_000
+    benunit:
+      members: [earner, partner]
+      is_married: true
+  output:
+    # The partner leaves £570 unused: 20% of it is £114.
+    marriage_allowance_if_income_conditions_met: [570, 0]
+    marriage_allowance_reduction_at_stake: [114, 0]
+
+- name: An unmarried couple has nothing at stake
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    people:
+      earner:
+        age: 40
+        employment_income: 30_000
+      partner:
+        age: 40
+    benunit:
+      members: [earner, partner]
+      is_married: false
+  output:
+    marriage_allowance_if_income_conditions_met: [0, 0]
+    marriage_allowance_reduction_at_stake: [0, 0]
+
+- name: A person who would not claim has nothing at stake
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    people:
+      earner:
+        age: 40
+        employment_income: 30_000
+        would_claim_marriage_allowance: false
+      partner:
+        age: 40
+    benunit:
+      members: [earner, partner]
+      is_married: true
+  output:
+    marriage_allowance_if_income_conditions_met: [0, 0]
+    marriage_allowance_reduction_at_stake: [0, 0]