Employee vs Contractor Calculator

Hiring someone costs a good deal more than the salary line suggests. Employers pay secondary Class 1 National Insurance at 15% on earnings above the Secondary Threshold, which is £5,000 for 2026/27, and auto-enrolment pension adds a minimum 3% of qualifying earnings. On top come recruitment fees, training, office space, equipment, employer's liability insurance and the cost of running payroll. Taken together those overheads usually add 20% to 35% to gross pay, so the budget line for a role is never the number on the offer letter.

Then there are the liabilities that surface only occasionally. Statutory sick pay, cover during maternity and paternity leave, redundancy exposure, statutory annual leave of at least 28 days, training investment and the management time a direct report absorbs all belong in the comparison. A contractor brings none of them, and that is the real attraction, since you pay for productive days and nothing else, and scaling up or down takes a notice period rather than a process.

A contractor's day rate looks high for a reason. It has to carry their own tax, insurance, pension, holiday, sick pay and the unpaid weeks between contracts. As a rough guide, annual billings need to run 30% to 50% above an equivalent salary before a contractor takes home the same amount, and where the engagement falls inside IR35 that gap widens further.

Put numbers on it and the shape becomes clear. An employee on £50k costs £6,750 in employer NI, being 15% of the £45k above the threshold, plus £2,500 of pension at a 5% match, giving a total employer cost of £59,250. The same role filled by a contractor at £400 a day across 220 days comes to £88k, with no NI or pension attached. On raw cost the contractor is dearer, but there is no holiday, sick pay or maternity cost, no employment law exposure, and headcount can be scaled without redundancy.

The tax position differs sharply on the worker's side. An employee pays PAYE at their marginal rate with employee NI at 8% and 2%, while the employer hands over its 15%, and the effective burden on £50k lands somewhere between 25% and 50% depending on the package. A limited company contractor outside IR35 takes a £12,570 salary plus dividends and sees an effective rate of 28% to 35% on £80k. The calculator follows that route, deducting £1,200 a year of accountancy as a company cost, and on the employee side it fits salary, 15% employer NI and a 3% employer pension on qualifying earnings inside the same budget. Inside IR35, or through an umbrella company, the treatment comes back to PAYE. A sole trader contractor pays Income Tax with Class 4 NI at 6% and 2%.

IR35 decides much of that. Inside the rules a contractor is taxed as an employee and the limited company advantage disappears. Outside them the efficiency stands. Since April 2021 medium and large clients determine status themselves, while small clients (meeting two of: turnover up to £15 million, balance sheet up to £7.5 million, 50 or fewer employees) leave the decision to the contractor. HMRC's CEST tool gives an initial view, and the substantive tests look at control, the right of substitution, mutual obligation and financial risk, with disputed cases ending at tribunal. Getting it wrong means employment taxes imposed retrospectively on unpaid NI and PAYE, so the relationship has to look like genuine self-employment in practice.

For the individual the trade is security against money. An employee gets the pension match, commonly 25 to 30 days of holiday plus bank holidays, statutory sick pay of £123.25 a week that employers often enhance, up to 39 weeks of maternity pay or 2 weeks of paternity pay, frequently private medical cover, and bonus, share and commission schemes within a career structure. A contractor gets none of that and self-insures, with income protection running £20 to £60 a month and the pension entirely their own problem. Time off is unpaid. Many take inside-IR35 work only at a premium of 20% to 30% over the permanent equivalent, and the best-paid corner of the market is outside-IR35 work above £500 a day.