You should first and foremost consult a lawyer specializing in labor law in your jurisdiction, firing people depending on your location can be easy or nigh-on impossible.
That said, I'd be very straight with this person, explain that you no longer wish to continue with them. If their contract will lapse within the next 6 months or so I wouldn't do anything other than maybe just buying out their contract for a lump sum. Otherwise just wait it out and hire your new guy/gal when you can afford it.
I'm not sure I like the 'we could pay a lot less' bit since that seems to indicate your motive is more economical than tied to this persons performance.
That said, I'd be very straight with this person, explain that you no longer wish to continue with them. If their contract will lapse within the next 6 months or so I wouldn't do anything other than maybe just buying out their contract for a lump sum. Otherwise just wait it out and hire your new guy/gal when you can afford it.
I'm not sure I like the 'we could pay a lot less' bit since that seems to indicate your motive is more economical than tied to this persons performance.