Contracting vs employment UK 2026

Our guides are drafted with AI assistance and checked against official and primary sources before publishing. Figures are reviewed on the date shown. General information, not professional advice.

The fundamental UK contracting vs employment question: how does a day rate translate to a permanent salary equivalent? Rule of thumb: day rate x 220-230 days x 0.85-1.0 depending on IR35 status, expense allowance, and how much risk you're absorbing. A £500/day outside-IR35 contractor nets roughly the same as a £80-95k permanent employee. A £500/day inside-IR35 contractor nets roughly £75-85k permanent. This guide gives the precise maths + decision framework.

Checked against the 3 sources listed below · Last reviewed 14 June 2026
On this page
  1. The headline maths
  2. How the maths works
  3. Benefit valuation (employee side)
  4. Non-financial factors
  5. The IR35 impact
  6. Decision framework
  7. In short

The headline maths

Day rate Outside IR35 (Ltd) equivalent permanent salary Inside IR35 equivalent permanent salary
£300 £55-65k £45-55k
£400 £75-85k £60-70k
£500 £95-110k £75-85k
£600 £115-130k £90-105k
£700 £135-155k £105-120k
£800 £155-180k £120-140k
£1,000 £190-220k £150-180k

Multipliers used: 220-230 working days x 0.85-1.0 effective utilisation.

How the maths works

A contractor on £500/day (outside IR35) earning 225 days/year: - Gross revenue: £112,500 - Limited company Corporation Tax (19% on profit ~£100k after salary + expenses): £19,000 - Personal extraction: - Salary £12,570 (tax-free under personal allowance) - Dividends ~£60-70k (taxed at dividend rates) - Net to contractor: ~£70-78k

Compare to £95k permanent employee: - PAYE Income Tax + NI: ~£28-30k - Net pay: ~£65-67k

The £5-10k contractor advantage at this level reflects: - Lower NI burden via salary/dividend split - Tax-deductible expenses + travel - Pension contributions as Corp Tax-deductible business expense

Benefit valuation (employee side)

The headline contractor advantage ignores what employees get:

Benefit Annual value (typical £75k+ role)
Employer pension match (5% typical, higher elsewhere) £3,750-£7,500
28 days paid holiday equivalent £8,000-£12,000
Sick pay (full pay 1-6 months) £3,000-£8,000 amortised
Private healthcare £1,000-£1,500
Equity / share scheme participation £0-£15,000+ depending on company
Life insurance + other benefits £500-£1,500

Total: £16,000-£45,000 of benefit value depending on employer.

Net of benefits, contractor advantage at £500/day vs £95k employee tends to be: - Cash: contractor +£5-10k - Once benefits valued: contractor +£0-5k or even -£5k

Non-financial factors

Contractor advantages

  • Flexibility on working hours / location
  • Multiple clients across a career
  • Higher financial ceiling (no employer cap)
  • Tax-deductible expenses (travel, equipment, etc.)
  • Skills development from varied projects

Employee advantages

  • Predictable income
  • Career structure + clear promotion paths
  • Workplace community + mentorship
  • Less admin
  • Easier mortgage + financial products
  • Statutory employment rights
  • Long-term role stability + relationships

Risk profile

Factor Contractor Employee
Income variability High (contract gaps, rate changes) Low
Sickness exposure High (no sick pay) Low
Pension build Variable (need self-discipline) Automatic
Career stagnation risk Lower (varied work) Moderate-high in some roles
Burnout risk Moderate (always selling) Variable

The IR35 impact

IR35 status Tax treatment Effective vs PAYE
Outside IR35 (Ltd) Corp Tax + dividend extraction 15-25% less tax
Inside IR35 (Ltd) Salary equivalent on engagement income ~Same as PAYE
Umbrella PAYE Full PAYE on engagement income ~Same as PAYE
Sole trader IT + Class 4 NI ~5-10% less tax

For inside-IR35 work, umbrella PAYE is often simpler than Ltd (no accountant cost, identical net) - particularly for short-term engagements.

Decision framework

Choose contracting when: - Day rate x 220 days x 0.9 > current permanent salary by 20%+ - You're outside IR35 (or have a clear outside-IR35 pipeline) - You have 3-6 months of essentials in savings (buffer for contract gaps) - You're comfortable with self-management + admin - Your pension contribution discipline is strong

Choose employment when: - Benefit package adds 25-35% to base salary (some tech / professional services) - Equity / share scheme has meaningful upside - You value predictable income + workplace structure - Mortgage / family circumstances require stability - Sector has weak contracting market (some specialist roles)

In short

UK contracting vs employment: outside-IR35 contracting at £500/day nets similar to £85-100k permanent after benefits. Inside-IR35 contracting nets similar to equivalent permanent. The financial advantage shrinks as employee benefit packages strengthen.

Frequently asked questions

Day rate to salary equivalent?

Day rate x 220-230 working days x 0.85-1.0 multiplier. £500/day outside IR35 ≈ £100-110k permanent. £500/day inside IR35 ≈ £80-90k permanent.

Why fewer than 252 working days?

Account for holidays (28 days), sickness (5-7), bank holidays (8), unpaid gaps between contracts (5-15 days/year average). 220-230 is realistic.

Do contractors pay more tax?

Mostly depends on IR35. Inside IR35: similar to PAYE. Outside IR35 via Ltd: typically 15-25% less tax than equivalent PAYE.

Should I become a contractor at age 30?

Depends on rate vs equivalent salary, work pipeline, and your tolerance for income variability.

Can I contract part-time?

Yes - many UK consultants engage on 2-4 days/week contracts. Pro-rata maths apply.

Sources

Tax rates and thresholds come from GOV.UK, HMRC and gov.scot. Salary and other figures come from the organisations named below.

  1. HMRC - IR35: off-payroll working
  2. GOV.UK - Income Tax rates
  3. GOV.UK - Set up a limited company

For the calculation methodology behind every figure on this page, see our methodology. For our review and update process, see our editorial standards.

Last reviewed: 14 June 2026. Next review due 14 December 2026.

Disclaimer: This page provides general information based on published HMRC and gov.scot figures. It is not personal tax or financial advice. For your specific situation, please consult a qualified accountant or contact HMRC directly.