Contractor vs Permanent Salary Calculator

Comparing contractor and permanent employment requires normalising both options to the same measure: annual take-home pay. For a contractor operating through a limited company, start with the day rate multiplied by the estimated number of working days per year (typically 220–230, minus holidays and bench time). From this gross revenue, deduct Corporation Tax, salary, employer NI on that salary, pension contributions, accountancy fees, insurance, and any other business costs.

The contractor's take-home is then the combination of a tax-efficient salary (usually £12,570 to use the personal allowance) plus dividends drawn from post-tax profits. Dividends are taxed at 8.75% basic rate, 33.75% higher rate, and 39.35% additional rate after the £500 dividend allowance. IR35 status is critical: if inside IR35, the tax advantage largely disappears because deemed employment taxes apply.

For the permanent role, total compensation includes base salary, employer pension contributions (minimum 3% under auto-enrolment), paid holidays (typically 25 days plus 8 bank holidays), sick pay, and any benefits such as health insurance, share schemes, or bonuses. The permanent employee also gains employment rights—redundancy protection, statutory maternity/paternity pay, and unfair dismissal rights—which have real economic value that does not appear on a payslip.

Day rate vs salary — true comparison. Equivalent annual: day rate × 220 (UK working days for contractor — 5 days × 52 weeks − holidays/sick). £400/day = £88,000 gross. Permanent equivalent (after benefits): typically £55,000-£65,000 salary. Contractor downsides: no paid holiday (~£3,400 at £400/day); no employer pension (~£3,200 at 5% match); no sick pay; no medical insurance; no employer NI (saves nothing for contractor). True 'equal' salary to £400/day = £62-£68k perm.

Outside IR35 — full contractor benefits. Limited company contractor outside IR35: salary £12,570 + dividends. Effective tax rate 28-35% on £80k+ income. Take-home advantage: 15-30% more than equivalent perm. Plus pension contributions tax-efficient through company. Plus business expenses deductible. Plus capital extraction flexibility (timing of dividends). Plus salary sacrifice options through Ltd (EV, gym, training). Outside IR35 is the 'gold standard' for contractor tax efficiency.

Inside IR35 — much less attractive. Pay as employee — PAYE + NI + employer NI all deducted at source. Effective tax 40-48% on same gross. Inside IR35 contractor: net take ~12-17% LESS than outside IR35 contractor on same contract. Compared to perm: small premium, no benefits (no employer pension, no sick pay, no holiday). Many contractors take inside-IR35 work only at premium 20-30% over perm equivalent — or refuse and pursue outside IR35 only.

Permanent role advantages. Job security (notice period 1-3 months minimum). Employer pension contributions (auto-enrolment 3% minimum, often 5-8% match). 25-30 days paid holiday. Statutory Sick Pay (£116.75/week) + employer enhancement (often 6 months full pay). Maternity/paternity leave (39-52 weeks paid). Bonus + shares + commission. Private medical insurance often included. Training and development. Career progression structure. Job changes typically every 2-4 years for raises.

Contracting longer-term — financial planning. Build 6-month emergency fund (vs perm 3-month). Pension contributions through Ltd: 100% deductible, no NI. Annual Allowance £60k (vs perm typically 3-15% of salary). Insurance: PI £60-£200/year, PL £50-£150/year, IR35 enquiry insurance £200-£400/year. 80% utilisation target (44 weeks worked, 8 unpaid). Account for: networking gaps between contracts (1-4 weeks typical); skills become stale (allocate 2-4 weeks/year for training). Best contractor financial pattern: emergency fund + pension contributions + diversified investments.