Income tax reductions offset the Step 7 charges (HICBC, annual allowance charge) #2544

income_tax returns max_(0, additions - subtractions), where income_tax_additions mixes the Step 5 tax (earned_income_tax, savings_income_tax, dividend_income_tax, property_income_tax) with two Step 7 charges (CB_HITC, personal_pension_contributions_tax), and income_tax_subtractions holds the Step 6 tax reductions (capped_mcad, other_tax_credits, property_finance_cost_relief). So a tax reduction larger than the Step 5 tax offsets the High Income Child Benefit Charge and the annual allowance charge.

The law

ITA 2007 s. 23 deducts tax reductions at Step 6 "from the amount of tax calculated at Step 5", then adds the s. 30 amounts at Step 7 "to the amount of tax left after Step 6".

• s. 29(2): a reduction may be deducted at Step 6 "only so far as there is sufficient tax calculated at Step 5"; s. 29(3) counts the reductions already deducted.
• s. 30(1) lists the Step 7 amounts, among them the high income child benefit charge (ITEPA 2003 Pt 10 Ch 8), the winter fuel payment charge (Ch 9) and the annual allowance charge (FA 2004 s. 227).
• s. 29(4A) to (4C) add a further cap, A − B, on the EIS, SEIS, SITR, VCT and CITR reductions, where B is the Gift Aid tax treated as deducted under s. 414.

The defects

1. other_tax_credits (an input lumping VCT, EIS, SEIS, CITR, SITR, maintenance relief and foreign tax relief) is not limited to the Step 5 tax, so any excess offsets Step 7 charges.
2. capped_mcad caps the married couple's allowance reduction at income_tax_pre_charges + CB_HITC, so it can offset the HICBC. Its cap should be the Step 5 tax left after the reductions deducted before it (s. 27(5) puts the VCT, EIS, SEIS, SITR, CITR and maintenance reductions first).
3. property_finance_cost_relief is already limited to the Step 5 tax left after the other reductions.

Example (2025-26): £20,000 of Step 5 tax, £25,000 of other_tax_credits, £2,000 of HICBC. The model gives £0 of income tax; the law gives £2,000.

Fix

Compute Step 5, Step 6 (the reductions, each with its own caps, limited in total to the Step 5 tax) and Step 7 separately, with explicit parameter lists for each, and income tax = Step 5 − Step 6 + Step 7.