Earn contractor revenue between £115,000 and £143,911 on a contract inside IR35 and you will be hit with a whopping 69% marginal rate of tax! Adding income tax, employer & employee national insurance would give the below marginal rates…
| Gross Revenue | Employer NI | Personal Taxable Pay | Income Tax | Employee NI | Total Marginal Rate |
| £0-£5,750 | 0% | £0-£5,750 | 0% | 0% | 0% |
| £5,750-£14,456 | 15% | £5,750-£12,570 | 0% | 0% | 15% |
| £14,456-£57,808 | 15% | £12,570-£50,268 | 20% | 8% | 39.3% |
| £57,808-£115,000 | 15% | £50,268-£100,000 | 40% | 2% | 51.5% |
| £115,000-£143,911 | 15% | £100,000-£125,140* | 60% | 2% | 68.9% |
| £143,911+ | 15% | £125,140+ | 45% | 2% | 55.9% |
Throw into the mix the tax free income bracket taper, where for every £2 earned over £100,000 (of personal taxable income,) you lose £1 of personal allowance, this gives the above true marginal rates of tax you pay as you progress through your revenue inside IR35.
The situation does improve somewhat after the income tax taper finishes, at revenue just over of £143,911, but still leaves you on a marginal rate of 56% from then onwards. This is the brutal reality of IR35 on small businesses and the self employed. Below i’ll detail a few strategies to minimise your tax liability, and keep more of your revenue.
Salary Sacrifice Pension Scheme
Arranged properly with your umbrella company, a salary sacrifice self invested personal pension is the best way to reduce your tax liability. In effect, all deductions to your pension are made before any tax is applied to your revenue, meaning savings on both employer and employee national insurance, as well as income tax. This gives marginal savings as high as 69% and would cost you just £311 to put £1,000 into your pension at certain levels of revenue. Now that sounds like a good deal doesn’t it? Of course this means the money is locked away until retirement, but with the current SIPP withdrawal age at 55 (57 from 2028) this will prove a very attractive option for many.
See the example below for someone earning a daily revenue of £600, working 5 days per week over a 47 week working year. Table dosen’t reflect the recent budget.
| Without SIPP Pension | With SIPP Pension | |
| Annual Revenue | £141,000 | £141,000 |
| Monthly Pension Contribution | £0 | £2,300 |
| Money In Pension | £0 | £27,600 |
| Total Tax | £64,291 | £45,516 |
| Revenue Retained | £76,709 | £95,484* |
| % | 54.4% | 67.7% |
A difference of £18,775 in retained income. £27,600 going into the pension costing just £8,825. All working the same number of days, can’t be bad! Having a tax strategy for your personal circumstances is vitally important to avoid the HMRC 68% tax trap, email us today to book your 30 minute consultation.
Note, any money in your SIPP pension may be subject to tax at the point of withdrawal. MKT coaching is not a pensions or tax adviser, and any advice on pension investments and retirement should be sought with the relevant experts.
Defer, or bring forward your income
There is certainly less control over this option as it may rely on having flexibility over your working days or payment terms with your client, but its a useful option to consider and understand none the less, for longer term tax planning. Using the same example as earlier, a daily revenue of £600 working 5 days per week over an average of a 47 week year, with no pension contribution. In option A, they will take payment for 47 weeks exactly in each year. In Option B, they will take payment for 52 weeks in the first year, and 42 weeks in the 2nd year, the same total number of weeks over two years.
| Option A | Option B | |
| Year 1 Revenue | £141,000 | £156,000 |
| Year 1 Tax | £64,291 | £72,742 |
| Year 2 Revenue | £141,000 | £126,000 |
| Year 2 Tax | £64,291 | £54,049 |
| Total Revenue | £282,000 | £282,000 |
| Total Tax | £128,582 | £126,791 |
| Revenue Retained | £153,418 | £155,209 |
| % | 54.4% | 55.0% |
The above example proves that even just altering working patterns or timesheet submissions can have an impact on the amount of tax paid. In option A, the individual is hit harder by the 68% tax trap as they have significant revenue in both years 1 and 2, whereas in option B the individual takes a bigger hit in year 1, but then a far lesser hit in year 2, saving £1,800 in the two years.
This can be combined with pension contributions, with an effective strategy taking a very aggressive pension approach in 1 year, and then very little in the 2nd year to yield a better outcome then taking the same approach in both years. Again, this is all down to personal circumstances.
Take a break
Read enough of this article and decided that the burden becomes too high at a certain point in time? Take my preferred option, if you are able to. Stop working and go travelling, start a side hustle or learn something new. Using the same example of £600 per day, 5 days per week, you could work just 38 weeks of the year, take a revenue of £113,800, pay £47,227 in tax, keeping £66,573 (58.5%) and enjoy life. Any additional weeks can be paid into a SIPP pension at 100%, and you can sleep a little better, knowing you’ve kept as much of your money as possible!
Thanks for reading.
MKT Financial Coaching 