Contractor vs Permanent — 2025/26 Comparison
Updated for the 2025/26 tax year
Choosing between contracting and permanent employment is one of the biggest career and financial decisions you can make. The right choice depends on your risk tolerance, lifestyle preferences, and tax situation.
Side-by-Side Comparison
| Factor | Permanent | Contractor |
|---|---|---|
| Pay | Fixed annual salary | Day rate (typically higher gross) |
| Holiday | 28 days paid (inc. bank holidays) | Unpaid — you don’t work, you don’t earn |
| Sick pay | Statutory + company scheme | None (unless insured) |
| Pension | Employer contributes 3%+ | Self-funded (SIPP) |
| IR35 risk | N/A | Must demonstrate genuine self-employment |
| Job security | Notice period (1–3 months typical) | Contract can end with short notice |
| Flexibility | Limited | Choose clients, hours, location |
| Tax efficiency | PAYE — limited options | Ltd company: salary + dividends (outside IR35) |
Day Rate to Salary Conversion
A common mistake is comparing gross day rate directly to salary. You must account for holidays, pension, benefits, and gaps between contracts. Assume 220 working days per year (252 minus 28 holiday minus ~4 days for gaps/sickness).
| Day Rate | Gross (220 days) | Perm Equivalent (after benefits) |
|---|---|---|
| £300 | £66,000 | ~£50,000 |
| £400 | £88,000 | ~£65,000 |
| £500 | £110,000 | ~£80,000 |
| £600 | £132,000 | ~£95,000 |
| £750 | £165,000 | ~£120,000 |
Worked Example: £70K Perm vs £500/day Contractor
Permanent Employee — £70,000 salary
- Gross salary: £70,000
- Income tax: £11,432
- Employee NI: £4,394
- Pension (5% employee): £3,500
- Take-home: ~£50,674
- Plus: employer pension (3%): £2,100, 28 days holiday, sick pay, training
Contractor — £500/day, Outside IR35, Ltd Company
- Gross revenue (220 days): £110,000
- Salary: £12,570 (tax-free)
- Employer NI on salary: £479
- Allowable expenses: ~£5,000
- Corporation tax (25%): ~£23,000
- Dividends: ~£69,000
- Dividend tax: ~£5,000
- Take-home: ~£76,091
- Minus: no paid holiday, no employer pension, no sick pay
Net difference: ~£25,417 more as contractor — but with more risk and no benefits
Ltd Company vs Umbrella
- Ltd company (outside IR35): Most tax-efficient. You control salary + dividends. Must run your own company (or pay an accountant ~£100–150/month).
- Umbrella company (inside IR35): The umbrella employs you and handles payroll. Simplest option but you pay PAYE tax + NI as if you were an employee. Typically costs £25–30/week.
- Key rule: If your contract is inside IR35, you must use an umbrella or accept PAYE. A Ltd company only benefits you if you are genuinely outside IR35.
Practical Tips
- Build a 6-month emergency fund before going contracting — gaps between contracts are normal.
- Get professional indemnity and public liability insurance (required by most clients).
- Budget for your own pension, holiday fund, and sick pay reserve.
- Check IR35 status before accepting any contract — it changes the entire financial picture.