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:
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 |
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