Reduce tax by using salary sacrifice in alternative years?

[lucyclarityumbrella]

Wow - that's a lot of information! One thing we would always recommend is that if someone finds themselves in the £100-£125k bracket, then (if it is right for you) sacrifice the amount over the £100k into a pension, obviously the savings are seen on the ERs NI and EEs NI too, so definitely an advantage! I guess from your perspective it is simply looking at which year you want to gain the savings, but yes if you dont use the pension allowances then they can roll forward.

[Smoggy]

The Scottish Budget today has got me thnking about how I may be able to use salary sacrifice on inside IR35 contracts to potentially save on tax. My current situation is that I'm on £850 inside, renewed until June. I salary sacrifice £150 per day, which if I work 220 days a year would give me taxable income of £164k and so taper my tax free allowance down to zero and put me in the top rate of tax (48% next year in Scotland).

My idea is that I stop all salary sacrifice in 2024/25 but then more or less double it to £333 in 2025/26. If I continue to work for a similar number of days at a similar rate then I continue to pay top rates in 24/25 but would keep my full tax free allowance in 25/26 as my taxable income after SS and e'r NI is £100k. (In reality I'd probably round up a bit to £350 to make sure I come in under the £100k figure).

If we average it out over the 2 years this should come at £2.2k less tax per year. This thinking makes an assumption I'll continue to be renewed or at least find work at a similar rate elsewhere. However, if I can't find a new contract at as good of a rate or no contract at all then I may be grateful for having retained more of my income in 24/25. If I get a better contract I can always up the salary sacrifice element to target the £100k. I'll have plenty of carryforward so annual allowance won't be an issue.

Also my umbrella charges a fee for using salary sacrifice so by not salary sacrificing for 12 months out of 24 I'll halve that expense as well (0.5 * £24 = extra £12 a month saving I think).

So I'm wondering if there's anything I've missed here? One thing is potential lost investment returns in my SIPP for the year I don't contribute but as long as I invest in similar funds in an ISA with the extra post-tax income I receive I think this is probably ok. One way around this would be to do the higher contribution year followed by the no contribution year? At times though I would perhaps need to use my warchest to support day to day spending which I'm not sure I'm comfortable with and it would then put pressure on me to find a similar contract the following year, as opposed to the added insurance that the original approach offers. A better outcome would perhaps be to try and use my full AA and carry forward to get down to £100k every year, but unfortunately I don't think my wife would support this idea as we'd need to reduce spending/lifestyle to do this without touching the warchest.

The figures below are based on Scottish rates but I think the same principle would apply in England. It's the tax hike at 100k that's the killer I'm trying to avoid at least half the time:

Inputs
Rate	850
Working Days	220				Salary Sacrifice	0	333	166.3636364
					Taxable Income	164,323	100,000	132,162
Tax/NI (Scotland)	lower limit	upper limit	rate
e'r NI			13.80%
ee NI lower	12570	50270	10%			3770	3770	3770
ee NI upper	50270	999999	2%			2281	995	1638
Starter	12571	14876	19%			438	438	438
Basic	14877	26561	20%			2337	2337	2337
Intermediate	26562	43662	21%			3591	3591	3591
Higher	43663	75000	42%			13162	13162	13162
Advanced (Lower	75001	100000	45%			11250	11250	11250
Advanced (Upper)	100000	125140	65.50%			16467	0	16467
Top	125140	999999	48%			18808	0	3370
					Total Tax	72103	35541	56022
					Average Tax	53822	53822	56022
					Saving	-2200	-2200