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Salary sacrifice above the April 2029 NI cap raises adjusted net income, but HMRC says the cap leaves ANI unchanged

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Assessment

Difficulty
4/5
Estimated time
3-5 days
Newbie friendliness
57/100
Issue type
Bug
Clarity
Mostly clear
Activity status
Active
Tech stack
python, yaml
Domain
backend, databases

Research direction

Trace salary_sacrifice_returned_to_income, employee_pension_contributions, pension_contributions_relief and adjusted_net_income in the relevant UK policy variables, then find the YAML tests for this case. Check the 2029-30 behavior against the issue’s example: ANI should remain at £97,000 less the broad-base haircut, income tax should match 2028-29 rules, and NI should apply to £8,000 more earnings.

Written by the indexing model from the issue text.

Description

What happens. From 6 April 2029, gov.hmrc.national_insurance.salary_sacrifice_pension_cap (£2,000) makes pension salary sacrifice above the cap subject to Class 1 NI. policyengine-uk models this by adding the excess (salary_sacrifice_returned_to_income) to employment_income. The same amount is added to employee_pension_contributions, and pension_contributions_relief gives the income tax relief. That relief enters allowances after adjusted_net_income, so ANI rises by the full excess.

What the law says. HMRC's policy paper, Salary sacrifice reform for pension contributions effective from 6 April 2029, says the measure changes Class 1 National Insurance only. It does not change salary sacrifice's effect on adjusted net income, and the paper names Tax-Free Childcare among the schemes unaffected.

Example (policyengine-uk 2.102.3). One parent with £97,000 employment income (employment_income_before_lsr) after £10,000 of pension salary sacrifice, and a two-year-old:

2028-29 2029-30
salary_sacrifice_returned_to_income £0 £8,000
adjusted_net_income £97,000.00 £104,844.80
extended_childcare_entitlement_meets_income_requirements True False
tax_free_childcare_meets_income_requirements True False

So the parent loses the 30 funded hours and Tax-Free Childcare in 2029-30, although under the measure their ANI stays below £100,000. The personal allowance taper and the High Income Child Benefit Charge, which both read ANI, are affected in the same way.

Suggested fix. For income tax the sacrifice stays a sacrifice under the measure; only Class 1 NI changes. So the excess above the cap should enter NI-able earnings only, not employment_income, employee_pension_contributions or pension_contributions_relief. Excluding it from ANI alone is not enough: the model also gives the excess as pension relief, so deducting it again from ANI double-counts it. In a quick test, income tax fell by about £4,200 against the correct figure. A YAML test with the case above should hold ANI at £97,000 (less the model's broad-base haircut) in 2029-30, with income tax unchanged from 2028-29 rules and NI charged on £8,000 more earnings.

Found while costing the removal of the £100,000 childcare limit (PolicyEngine/uk-childcare-100k-threshold#1), which applies this correction locally until it is fixed upstream.

Dominant language
Python
Stars
51
Forks
34
Avg merge
2d 13h
Merged PRs (30d)
177

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