Contractor vs Permanent Salary Calculator UK 2025–26
Enter your day rate and a permanent salary to compare take-home pay under both arrangements. Uses the outside-IR35 limited company model with 2025–26 tax rates.
How the contractor vs permanent comparison works
The comparison uses two different tax models: the limited company (outside IR35) model for the contractor, and standard PAYE for the permanent employee.
The limited company model (outside IR35)
Operating through a limited company outside IR35 is typically the most tax-efficient structure for contractors. The company invoices for the contractor's services and receives the income as revenue. The contractor draws an optimal salary equal to the personal allowance (£12,570) to avoid income tax on the salary while still building NI credits. The remaining profit, after corporation tax at 19% (the small profits rate), is paid as dividends.
Dividends are taxed at lower rates than salary: 8.75% in the basic rate band and 33.75% in the higher rate band. The £500 dividend allowance means the first £500 of dividends each year is tax-free.
What the calculation does not model
The calculator models the structural tax difference between employment and limited company contracting. It does not account for the employer pension contributions (typically 3–8% of salary) that permanent employees receive, paid holiday (typically 28 days statutory), sick pay, life assurance, private medical insurance, or other benefits. These can add 10–20% to the effective value of a permanent package.
IR35 risk
If a contract is deemed inside IR35, the tax calculation is entirely different — the contractor's income is treated as deemed employment, and the full PAYE + NI regime applies with no benefit of the limited company structure. In many cases a contractor inside IR35 takes home less than an equivalent permanent employee on the same gross, because the contractor also bears the employer NI.
Frequently asked questions
How is contractor take-home calculated?
This calculator uses the outside-IR35 limited company model. The contractor draws a salary equal to the personal allowance (£12,570) to minimise income tax and NI, then takes the remaining after-tax profit as dividends. Corporation tax at 19% (small profits rate) is applied first, and dividend tax applies to the dividend income above the £500 dividend allowance. £3,000 per year is deducted for typical contractor expenses such as accountancy and professional insurance.
What is the IR35 risk for contractors?
IR35 legislation determines whether a contractor should be treated as an employee for tax purposes. If HMRC determines you are inside IR35, your entire income is treated as deemed employment income and subject to full PAYE, employee NI, and employer NI — significantly reducing your take-home pay. The IR35 calculator on Credibrate can help you compare inside vs outside scenarios.
Does the contractor take-home include holidays?
No — unlike permanent employees who receive paid holiday, contractors only earn when they bill days. The default 220 working days already accounts for approximately 28 days of non-billed time. If you take more holiday or have gaps between contracts, your annual turnover (and therefore take-home) will be lower.
What other costs should a contractor consider?
Beyond the £3,000 expenses modelled here, contractors typically pay for their own professional indemnity insurance, public liability insurance, employer's liability insurance, accountancy fees, and IR35 insurance. You also lose employer pension contributions, company sick pay, life insurance, and other benefits typically provided to permanent employees. The true comparison must account for all these factors.
At what day rate does contracting become worthwhile?
This depends on the equivalent permanent salary and the value you place on benefits and security. As a rough guide, contractors typically need a day rate of 1.5–2× the equivalent daily rate of the permanent salary to be financially equivalent after accounting for missing benefits, gaps between contracts, and the costs of running a limited company.
Related calculators
This calculator provides estimates only. Results are based on the 2025–26 tax year. Credibrate is not a tax adviser. For personalised advice speak to a qualified accountant.