Contractor vs permanent: the honest financial comparison
The Real Picture
More gross pay doesn't mean more take-home after tax, bench time, and no employer benefits.
The gross rate vs take-home reality
£500/day contractor looks better than £65k salary on the surface. But the comparison is unfair: one is daily rate, the other is annual salary.
Let's work it out. £500/day × 176 billing days (realistic: 220 working days less 20 holiday, less 24 bench/admin) = £88,000 gross revenue. This is not take-home. After corporation tax (~£14,300), personal tax (~£14,500), accountancy (£1,800), insurance (£300), and no pension funding: approximately £40–50k net annually.
The permanent employee earning £65,000 nets ~£49,700 after personal tax/NI. So they're ahead, plus they have job security and benefits.
What a permanent employee receives that contractors don't
Employer pension contribution: 3–8% matching. As a contractor, you fund 100% yourself, and most contractors underfund dramatically.
Paid sick leave: Typically 3–5 days/year. Contractors get zero. If you're ill and can't work, you don't invoice and you don't earn.
Paid annual leave: 20+ days/year. Contractors have to account for this themselves. Two weeks = £7,000 lost revenue at £500/day.
Professional development: Training budgets, conference attendance, mentoring. Contractors often pay own costs.
Health insurance top-up: Many employers contribute to health plans. Contractors self-fund.
Maternity/paternity pay: Statutory + often enhanced. Contractors: zero.
The full employer cost you now carry yourself
Accountancy: £1,500–2,500/year for contractor specialist accountancy.
Insurance (PI, cyber): £200–600/year depending on specialism and turnover.
Equipment and software: £500–2,000/year (laptop, software licenses, subscriptions).
Pension funding: Entirely your responsibility. Most contractors underfund it massively.
Tax reserve: 25–35% of every invoice must be set aside for corporation tax, personal tax, and NI.
Bench provision: Average contractor has 2–6 weeks unpaid bench per year.
The breakeven day rate
To match a £65,000 permanent salary in real take-home pay, a contractor typically needs a day rate approaching £520–550 (depending on tax efficiency, overheads, and business model).
Why? Because the permanent employee's £65k is already net of their personal tax and NI, plus they have pension contributions, paid leave, sick pay, and benefits covered by the employer. The contractor rate must cover all of that from gross.
Worked example: £65,000 salary vs £420/day contract
Permanent employee at £65,000/year:
- Gross salary: £65,000
- Personal tax: ~£10,200
- Employee NI: ~£5,100
- Net take-home: ~£49,700
- Employer pension contribution: ~£3,250
- Paid holiday: 20 days (~£5,000 equivalent)
- Sick pay: 3 days (~£750)
- Total benefit value: ~£59,000
Contractor at £420/day (176 billing days):
- Annual revenue: £73,920
- Less accountancy: -£1,800
- Less insurance: -£300
- Trading profit: £71,820
- Corporation tax @ 19%: -£13,646
- Available for extraction: £58,174
- Personal tax + NI on extraction: -£14,500
- Net take-home after 12 months: ~£43,674
- No pension funding, no paid leave, no sick pay, zero job security
The permanent employee comes out ahead by ~£6,000/year in actual take-home, plus has security and benefits.
Know the real numbers
Contracting can pay better, but gaps are narrower than headlines suggest.
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