Change from permanent to contractor job to avoid high rate of tax on Rental income

nasirbaig007

Hi , 

I am on a high rate tax payer on my permanent job salary . In addition i have 3 BTL properties which generate around 50K per annum in gross rents . So i get taxed at higher rate on rental income . 

I am thinking of moving my job from permanent to contractor ( within or outside IR35 ) , to bring my tax bill down by making me fall into basic rate tax bracket . 

can some one help to confirm if my thinking of moving my job fro permanent to contractor basis is correct and provide some more guidance on how to reduce tax bill on rental income. 

Thanks

Grumpy_chap

nasirbaig007 said:

Hi , 

I am on a high rate tax payer on my permanent job salary . In addition i have 3 BTL properties which generate around 50K per annum in gross rents . So i get taxed at higher rate on rental income . 

I am thinking of moving my job from permanent to contractor ( within or outside IR35 ) , to bring my tax bill down by making me fall into basic rate tax bracket . 

can some one help to confirm if my thinking of moving my job fro permanent to contractor basis is correct and provide some more guidance on how to reduce tax bill on rental income. 

Thanks

With a permanent job salary over £50k plus the BTL portfolio, do you have an Accountant?  They are the best placed to advise on this type of strategy.

The BTL's generate £50k of income but only the amount after allowable expenses are deducted will be subject to income tax.

There are two ways you can reduce your higher rate tax liability within the current job - either pension contributions or Gift Aid.  For the former, the most tax efficient will be if your employer will allow additional pension contributions through Salary Sacrifice.

Then, the option to leave the current employment and become a contractor.
Are you suggesting to become a contractor with the current employer - essentially just changing the status of the current job?  I'd be surprised if the employer was keen on that, but there may be scenarios where that is agreeable.  In that situation, the roles will almost certainly be inside-IR35 and the tax reduction opportunities no greater than being an employee (except that the Umbrella Company may facilitate salary sacrifice which the employer may not).

Alternatively, are you suggesting to leave the current job and start a new contractor work elsewhere?
In this scenario, if the new role is inside-IR35, the tax position will be much the same as the same approach with current employer.
For a new role outside-IR35, you would likely consider your own Ltd Co. rather than sole-trader (if the objective of the change is to minimise tax liabilities).  There are many options to consider here and it would be sensible to take the advice of an Accountant.  

For a quick solution, maximising pension contributions is the "quick-win" subject to contribution limits.

nasirbaig007

Thanks Grumpy_chap for the detailed reply. 
I am actually considering leaving the current job and then get a contractor job preferably outside IR35 . So was really looking to get some insight how much of a tax deduction i can expect going down that route . 

And yes my employer allows pension contributions through salary sacrifice , but in order to do that i will have to put in pension really big amount to push myself into lower tax bracket . Moreover i really do not want to put in pension , because i plan to keep the cash myself so that i can use it readily to reduce my mortgage debt or expand to more BTLs . 

Thanks

macman

Why expand to more BTL's which will generate more income and more tax paid at the higher rate?
Putting as much into your pension as you can is a no-brainer, as there is no other investment that gives you the same level of return without any risk.

Dazed_and_C0nfused

macman said:

Why expand to more BTL's which will generate more income and more tax paid at the higher rate?
Putting as much into your pension as you can is a no-brainer, as there is no other investment that gives you the same level of return without any risk.

I don't think you can genuinely say without any risk.

If it's invested within the pension wrapper there is some risk, even if at the lower end of the spectrum.

But if it's kept in cash then you lose to inflation.  

nasirbaig007

macman said:

Why expand to more BTL's which will generate more income and more tax paid at the higher rate?
Putting as much into your pension as you can is a no-brainer, as there is no other investment that gives you the same level of return without any risk.

i would like to expand to more BTLs because when I could get the same income from BTL as my current day job i would like to stop working day job and be a more independent.

Jeremy535897

If you want to build a significant portfolio of rental properties, it may be worth while taking advice on whether you should hold them in a company.

Grumpy_chap

nasirbaig007 said:

Thanks Grumpy_chap for the detailed reply. 
I am actually considering leaving the current job and then get a contractor job preferably outside IR35 . So was really looking to get some insight how much of a tax deduction i can expect going down that route . 

And yes my employer allows pension contributions through salary sacrifice , but in order to do that i will have to put in pension really big amount to push myself into lower tax bracket . Moreover i really do not want to put in pension , because i plan to keep the cash myself so that i can use it readily to reduce my mortgage debt or expand to more BTLs . 

Thanks

You really need to take professional advice of an Accountant. 

If your plan is to build a BTL portfolio, then you need to have assessed whether this is better as a personally owned portfolio or if you would be worth creating an SPV Ltd Co (Special Purpose Vehicle) to hold the BTLs.  Usually not practical to swap the investment properties you already have from personal to Ltd Co properties (because of stamp duty).  Through an SPV Ltd Co, there is the option to flex the timing of drawings and manage personal taxation implications, no CGT (capital gains tax) but the Ltd Co will pay corporation tax instead.  All quite involved and requires full assessment.  SPV Ltd Co also allows you to take the BTL income as salary or dividend or pension contributions (subject to the applicable limits).

Another consideration with BTL, and you've not mentioned whether you have a partner / married, but joint ownership between a couple can allow the tax to be spread.  Quite beneficial if one of a couple is non-earning, e.g. during child-raising years plus the CGT will benefit from two set of relief.

Pension contributions are restricted to Annual Allowance of £40k (total - employee plus employer) contributions, but you may have the ability to use carry-forward from previous years.  Pension contributions can also not exceed the total amount of earned income (BTL income is not earned income) in the tax year, except that this part of the cap does not apply to employer contributions.

If you do contracting outside-IR35, have you investigated whether that is realistically possible in your industry at the moment?  Many business sectors have gone to a virtually blanket inside-IR35 position (even though the rules say that should not happen).  If you do contracting outside-IR35, the most tax flexible approach is usually via own Ltd Co.  It is quite likely that a trading Ltd Co could not also be a BTL Ltd Co (assuming any borrowing required for the BTL as lenders will require the SPV Ltd Co. model).

It is hard for anyone to give much more in here, in part because you are being rather coy.

nasirbaig007 said:

I am on a high rate tax payer on my permanent job salary .
In addition i have 3 BTL properties which generate around 50K per annum in gross rents .

Higher rate employment could mean £50,271 or anything above that.  Practical options vary from just over that threshold to far over that threshold.

BTL gross rents £50k - the important figure for consideration of minimising personal tax liabilities is income after deduction of allowable expenses.

There are further considerations that may apply, HICBIC withdrawal and / or withdrawal of personal allowance.  If you are in either of these bands then effective marginal tax rate is 63.25% (income tax, taper, NI).  It really makes sense to use Salary Sacrifice if possible to increase pension contributions and avoid that level of taxation.

Salary Sacrifice is the most tax-efficient means of pension contribution as it also avoid NI, whereas payment into a pension after tax only allows the tax to be recovered into the scheme.

EDIT:  Given the OP's level of earned income plus BTL income, they will need to complete a tax return each year.  Does the OP have the services of an Accountant to support that task?  If not, it would almost certainly be a good investments.

nasirbaig007

Hi Grumpy_chap , Thanks again & sorry for missing out details earlier. Here i will provide more info
1. permanent job gross salary is £77K 
2. i have a spouse whose name is on 2 properties & she is not working, so yes we can spread tax for those 2 properties 
3. i have not calculated allowable expenses & tax free allowances on BTLs yet.
4. initial search on job-sites do indicate that there may be a possibility to get outside ir35 jobs in my industry i.e IT in finance.

This post is very initial research on whether my plan for moving from permi to contractor job is right direction to move in or whether i need to start considering something else.
so all the inputs coming from you and others are very helpful & much appreciated.
Thanks