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.