Employee vs Contractor Calculator

The true cost of employing someone extends well beyond their gross salary. Employers pay secondary Class 1 NI contributions at 15% on earnings above the Secondary Threshold (£9,100 for 2025/26). Auto-enrolment pension contributions add a minimum 3% of qualifying earnings. Additional employer costs often include recruitment fees, training, office space, equipment, employer's liability insurance, and payroll administration. These overheads typically add 20–35% on top of the gross salary.

A contractor or freelancer, by contrast, charges a day rate or project fee with no employer NI, pension, or benefit obligations on the hiring business. However, the day rate is typically higher to compensate the contractor for bearing their own tax, insurance, pension, holiday, sick pay, and bench time between contracts. A rough equivalence is that a contractor's annual billings need to be 30–50% higher than an equivalent salary to achieve the same take-home, depending on IR35 status.

The comparison must account for hidden employer costs: statutory sick pay obligations, maternity/paternity cover, redundancy liability, annual leave (typically 28 days minimum), training investment, and management overhead. Contractors provide flexibility—you pay only for productive days—but the relationship must genuinely reflect self-employment to avoid IR35 reclassification, which would impose employment taxes retrospectively on unpaid NI and PAYE.