Deduct only each person's own tax and NI on earnings from UC earned income

changelog.d/uc-earned-income-own-tax.fixed.md

@@ -0,0 +1 @@
+Deduct from each person's Universal Credit earnings only their own income tax and National Insurance on that employment or self-employment (UC Regs 2013 reg. 55(5)(b), reg. 57(2) step 3), not the whole benefit unit's tax on all income, so tax on pensions, State Pension, property, savings and dividends, the High Income Child Benefit Charge and voluntary Class 3 contributions no longer reduce earned income.

docs/book/programs/gov/dwp/universal-credit.ipynb

@@ -44,7 +44,7 @@
   {
    "cell_type": "markdown",
    "metadata": {},
-   "source": "## How PolicyEngine computes Universal Credit\n\nPolicyEngine computes Universal Credit at the benefit-unit level in three stages:\n\n1. **Maximum entitlement** (`uc_maximum_amount`): sum the elements the benunit qualifies for — `uc_standard_allowance`, `uc_child_element`, `uc_disability_elements`, `uc_carer_element`, `uc_housing_costs_element`, and `uc_childcare_element`.\n2. **Means test**: the maximum entitlement is reduced by the benunit's countable earnings above its work allowance (`uc_work_allowance`) at the published taper rate (the `gov.dwp.universal_credit.means_test.reduction_rate` parameter, currently 55%), plus all of its unearned income (`uc_unearned_income`), pound for pound. Unearned income is the list in `gov.dwp.universal_credit.means_test.income_definitions.unearned`: retirement pension income (State Pension and private pensions, UC Regulations 2013 regs 66(1)(a) and 67), Carer's Allowance, carer support payment (up to the Carer's Allowance rate, from November 2023), contribution-based JSA and ESA, maternity allowance, industrial injuries benefit, and the tariff income deemed from capital (reg 72). Actual savings interest, dividends and ordinary rental income are excluded from UC unearned income at every capital level; capital counts through its tariff income instead. Asset rules apply on top of this — capital above the lower threshold deems a tariff income, and capital above the upper threshold disqualifies the benunit entirely.\n3. **Benefit cap**: the post-means-test award (`universal_credit_pre_benefit_cap`) is finally reduced by `benefit_cap_reduction` to produce `universal_credit`. The benefit cap only applies to benunits without a benefit-cap exemption (working enough hours, having a qualifying disability benefit, etc.).\n\nThe take-up step is handled by the input variable `would_claim_uc`, which is populated stochastically when the dataset is built so that PolicyEngine's caseload aggregates match published DWP claimant numbers rather than the full eligible population.\n\nParameters live in `policyengine_uk/parameters/gov/dwp/universal_credit/` and the per-element formulas in `policyengine_uk/variables/gov/dwp/universal_credit/`."
+   "source": "## How PolicyEngine computes Universal Credit\n\nPolicyEngine computes Universal Credit at the benefit-unit level in three stages:\n\n1. **Maximum entitlement** (`uc_maximum_amount`): sum the elements the benunit qualifies for — `uc_standard_allowance`, `uc_child_element`, `uc_disability_elements`, `uc_carer_element`, `uc_housing_costs_element`, and `uc_childcare_element`.\n2. **Means test**: each person's earnings (`uc_individual_earned_income`) are net of their own relievable pension contributions and the income tax and National Insurance they pay on that employment or self-employment (UC Regulations 2013 regs 55(5) and 57(2)): `uc_income_tax_on_earnings` treats earnings as the lowest slice of the person's non-savings income, so tax on pensions, property, savings and dividends is never deducted, and one partner's tax never reduces the other's earnings. The maximum entitlement is then reduced by 55% (the `gov.dwp.universal_credit.means_test.reduction_rate` parameter) of the benunit's combined earnings above its work allowance (`uc_work_allowance`), and by all of its unearned income (`uc_unearned_income`), pound for pound. Unearned income is the list in `gov.dwp.universal_credit.means_test.income_definitions.unearned`: retirement pension income (State Pension and private pensions, UC Regulations 2013 regs 66(1)(a) and 67), Carer's Allowance, carer support payment (up to the Carer's Allowance rate, from November 2023), contribution-based JSA and ESA, maternity allowance, industrial injuries benefit, and the tariff income deemed from capital (reg 72). Actual savings interest, dividends and ordinary rental income are excluded from UC unearned income at every capital level; capital counts through its tariff income instead. Asset rules apply on top of this — capital above the lower threshold deems a tariff income, and capital above the upper threshold disqualifies the benunit entirely.\n3. **Benefit cap**: the post-means-test award (`universal_credit_pre_benefit_cap`) is finally reduced by `benefit_cap_reduction` to produce `universal_credit`. The benefit cap only applies to benunits without a benefit-cap exemption (working enough hours, having a qualifying disability benefit, etc.).\n\nThe take-up step is handled by the input variable `would_claim_uc`, which is populated stochastically when the dataset is built so that PolicyEngine's caseload aggregates match published DWP claimant numbers rather than the full eligible population.\n\nParameters live in `policyengine_uk/parameters/gov/dwp/universal_credit/` and the per-element formulas in `policyengine_uk/variables/gov/dwp/universal_credit/`."
   },
   {
    "cell_type": "code",

policyengine_uk/tests/policy/baseline/finance/benefit/family/universal_credit/income/uc_earned_income.yaml

@@ -5,10 +5,11 @@
     employment_income: 1_000
     miscellaneous_income: 100
     uc_work_allowance: 10
-    # The claimant's own tax (UC reg 22 counts the claimant's earnings).
-    tax: 1
+    # The claimant's own tax on these earnings.
+    uc_income_tax_on_earnings: 1
   output:
-    uc_earned_income: 1100 - 11
+    uc_individual_earned_income: 1_100 - 1
+    uc_earned_income: 1_100 - 11
 
 - name: Capped at 0
   period: 2025
@@ -17,7 +18,46 @@
     employment_income: 1_000
     miscellaneous_income: 100
     uc_work_allowance: 2_000
-    # The claimant's own tax (UC reg 22 counts the claimant's earnings).
-    tax: 1
+    # The claimant's own tax on these earnings.
+    uc_income_tax_on_earnings: 1
   output:
     uc_earned_income: 0
+
+- name: Each person's deductions come off only their own earnings
+  period: 2025
+  absolute_error_margin: 0
+  input:
+    people:
+      earner:
+        employment_income: 1_000
+        uc_income_tax_on_earnings: 100
+        uc_national_insurance_on_earnings: 10
+      partner:
+        uc_income_tax_on_earnings: 500
+        pension_contributions: 50
+    benunits:
+      benunit:
+        members: [earner, partner]
+        uc_work_allowance: 0
+  output:
+    uc_individual_earned_income: [890, 0]
+    uc_earned_income: 890
+
+- name: Work allowance comes off combined earnings after each person's deductions
+  period: 2025
+  absolute_error_margin: 0
+  input:
+    people:
+      earner:
+        employment_income: 1_000
+        uc_income_tax_on_earnings: 100
+      partner:
+        employment_income: 500
+        pension_contributions: 50
+    benunits:
+      benunit:
+        members: [earner, partner]
+        uc_work_allowance: 300
+  output:
+    uc_individual_earned_income: [900, 450]
+    uc_earned_income: 1_050