Contractor vs Permanent Salary Calculator

Comparing a day rate with a salary only works once both are reduced to the same measure, which is annual take-home pay. For a contractor working through a limited company, the starting point is the day rate multiplied by the days actually billed, usually 220 to 230 once holidays and time between contracts are taken out. Off that gross revenue come Corporation Tax, the salary paid, employer NI on that salary, pension contributions, accountancy fees, insurance and any other business costs before anything reaches the person doing the work. The calculator does this for both sides, assuming the contract is outside IR35: the permanent salary after income tax and employee NI, and the contract revenue after a £12,570 salary, employer NI on it, the business costs you enter, Corporation Tax and dividend tax. It also finds the break-even day rate at which the company could pay the same employer pension as the permanent job and still leave the contractor as much take-home as the employee.

What is left arrives in two parts. There is a tax-efficient salary, usually £12,570 to use the Personal Allowance, and then dividends drawn from post-tax profits. Dividends are taxed at 10.75% in the basic rate band, 35.75% at the higher rate and 39.35% at the additional rate once the £500 dividend allowance is used. IR35 sits behind all of it, because a contract inside the rules attracts deemed employment taxes and most of the advantage disappears.

On the permanent side, total compensation is a good deal more than base salary. Employer pension contributions start at the auto-enrolment minimum of 3% of qualifying earnings and often reach a 5% to 8% match, holiday is at least the statutory 28 days including bank holidays and often 25 days plus 8 bank holidays, statutory sick pay of £123.25 a week is frequently enhanced to as much as 6 months at full pay, statutory maternity pay runs for 39 weeks of up to 52 weeks of maternity leave, and paternity leave is up to 2 weeks. Bonuses, shares, commission, private medical cover, training and a career structure sit alongside a notice period of 1 to 3 months. Redundancy protection, statutory family leave and unfair dismissal rights carry real economic value that never appears on a payslip.

The headline arithmetic is simple enough. A £400 day rate across 220 days is £88,000 of gross revenue. Outside IR35, after £2,100 of accountancy and insurance, Corporation Tax and dividend tax, that leaves £58,551 of take-home, which a permanent employee would need a salary of about £82,700 to match. Inside IR35 it leaves about £54,570, the same as a salary of about £75,900. Those figures already count the 40 weekdays a year the contractor is not billing, so paid holiday should not be added again on the permanent side. Working the other way, a £55,000 permanent job with its £1,320.90 minimum employer pension is matched outside IR35 at about £270 a day, 28% above the salary divided by 260, and inside IR35 at about £300 a day, around 40% above. Anything over those rates is what pays for gaps between contracts, sick days and the notice, redundancy and family-leave rights given up.

Outside IR35 the limited company route is at its most efficient. Counting Corporation Tax, dividend tax and employer NI on the salary, the effective rate on revenue is about 30% at £80,000, 35% at £100,000 and 38% at £120,000, before business costs. Pension contributions go in through the company free of Corporation Tax and NI, business expenses are deductible, and dividends can be timed across tax years. Salary sacrifice, on the other hand, has kept its tax advantage since April 2017 only for pensions, cycle-to-work schemes, ultra-low-emission cars and, for existing members, childcare vouchers, so perks such as gym membership are taxed on the salary given up.

Inside IR35 the picture changes. Through an umbrella, employer NI, the 0.5% Apprenticeship Levy and the umbrella margin come out of the rate before PAYE and employee NI, so the effective rate on revenue is about 37% at £80,000 and 42% at £120,000, and take-home falls roughly 6% to 12% below what the same contract would leave outside the rules on £60,000 to £120,000 of revenue. None of the permanent benefits come with it, and the break-even against a permanent salary moves to around 40% above the salary divided by 260, which is why many contractors accept inside-IR35 work only at a rate above that, or turn it down.

Contracting for the long run needs its own financial plan. Six months of emergency fund is the usual target against 3 months for an employee, since gaps between contracts of 1 to 4 weeks are normal and 2 to 4 weeks a year should be set aside for training before skills go stale. Working to an 80% utilisation target means 44 weeks billed and 8 unpaid. Pension contributions through the company are fully deductible with no National Insurance and an Annual Allowance of £60k, against the 3% to 15% of salary a typical employer scheme provides. Insurance is the other fixed cost, with professional indemnity at £60 to £200 a year, public liability at £50 to £150 and IR35 enquiry cover at £200 to £400.