Edit salary sacrifice implementation

[vahid-ahmadi]

Description

This PR implements the £2,000 salary sacrifice pension cap from the Autumn Budget 2025, which takes effect from April 2029.

Summary

• Adds parameter salary_sacrifice_pension_cap (£2,000 from 2029-04-06, infinity before)
• Excess above cap is redirected to regular employee pension contributions
• Applies 13% employer haircut on excess (employers spread NI costs across workers)
• Revenue impact: ~£3.6 billion (NI: £2.0bn, Income Tax: £1.1bn due to pension relief caps)

Key changes

• New parameter: gov.hmrc.national_insurance.salary_sacrifice_pension_cap
• New variables: salary_sacrifice_returned_to_income, employee_pension_contributions_reported
• Modified variables: employment_income (adds excess for NI), employee_pension_contributions (adds excess for
  income tax relief)
• Simulation: Added input aliasing for employee_pension_contributions →
  employee_pension_contributions_reported

Usage

  # Reform (with cap - current law)
  reform = Microsimulation()

  # Baseline (no cap)
  baseline = Microsimulation(reform={
      "gov.hmrc.national_insurance.salary_sacrifice_pension_cap": {
          "2029": float("inf"),
          "2030": float("inf"),
      }
  })


  revenue = reform.calculate("gov_balance", 2030).sum() - baseline.calculate("gov_balance", 2030).sum()

Test plan

• Revenue impact test (~£3.3bn ± £1.5bn)
• NI increases with reform (>£1bn)
• Income tax impact test
• Excess redirected to pension contributions
• Employer haircut (13%) applied correctly
• Affected population (~3.3 million workers)

[MaxGhenis]

Fixed: Broad-base haircut implementation

The previous implementation had a fundamental error in how the employer haircut was modeled.

The Problem

The old code applied a 13% targeted haircut to only affected workers' excess:

# OLD (wrong)
excess = max_(intended_ss - cap, 0)
haircut = 0.13  # 13% of excess
return excess * (1 - haircut)  # Only 87% redirected

This is economically incorrect because employers cannot target only salary sacrificers without those workers negotiating to recoup the loss.

The Fix

Per the blog methodology:

Broad-based employer response: Employers spread the increased National Insurance costs across all employees... With £13.8 billion in excess contributions generating £2.1 billion in additional employer NI (at 15%), this translates to a 0.16% reduction in employment income across all workers.

The new implementation:

1. Full excess is redirected - the £13.8bn excess goes entirely to employee pension contributions
2. Broad-base haircut - ALL workers get a 0.16% reduction in employment income (new variable salary_sacrifice_broad_base_haircut)
3. Parametric - users can adjust both the cap and the haircut rate

New Parameters

• gov.hmrc.national_insurance.salary_sacrifice_pension_cap - the £2,000 cap (unchanged)
• gov.contrib.behavioral_responses.salary_sacrifice_broad_base_haircut_rate - 0.0016 (0.16%)

Verification

from policyengine_uk import Microsimulation
sim = Microsimulation()
print(sim.calculate('salary_sacrifice_broad_base_haircut', 2030).sum() / 1e9)  # -£2.3bn
print(sim.calculate('salary_sacrifice_returned_to_income', 2030).sum() / 1e9)  # £13.6bn

The broad-base haircut is -£2.3bn (total employment income ~£1.4T × 0.16%), and full excess of £13.6bn is redirected.

[vahid-ahmadi]

Fixed: Broad-base haircut implementation

Is there any reference for the 0.16% rate?

[vahid-ahmadi]

@PolicyEngine please review this pr.

[policyengine]

⚙️ Running tests to verify the implementation...