Contractor vs permanent: the real take home math nobody shows you

A recruiter emails you two versions of the same job. One is permanent at £60,000. The other is a contract at £500 a day. Five days a week, that day rate annualises to £120,000 on paper. Twice the salary for the same work, sitting at the same desk. It is very hard not to feel like the permanent version is a con.

Then you actually run the numbers, and the picture gets a lot more interesting. The day rate is bigger, but it has to pay for a long list of things your salary quietly covered. Here is the full comparison for the 2025/26 tax year, line by line, with nothing hidden.

The salary is the easy part

Start with the permanent offer, because it is the simpler calculation. On £60,000 in England for 2025/26, the personal allowance is £12,570 and stays tax free, according to HMRC. The next £37,700 sits in the 20 percent basic rate band, which is £7,540 of income tax. The slice from £50,270 to £60,000 falls into the 40 percent higher rate band, adding £3,892. That is £11,432 in income tax.

National Insurance is layered on top. HMRC charges employees 8 percent on earnings between £12,570 and £50,270, which is £3,016, then 2 percent on everything above, another £195. Total NI of £3,211.

So the permanent employee keeps £60,000 minus £11,432 minus £3,211, which is £45,357 a year, or about £3,780 a month landing in the bank. Every month, the same figure, whether they are ill, on holiday, or between projects.

And there is more that never shows up on the payslip. Under auto enrolment the employer must pay a minimum pension contribution, and most decent employers put in 4 or 5 percent, which on this salary is roughly £2,400 to £3,000 a year of free money. The employee gets 5.6 weeks of paid holiday, the statutory minimum set by the Working Time Regulations, which for a five day week is 28 days. They get Statutory Sick Pay of £118.75 a week for 2025/26 if they are off ill, and usually far more through company sick pay. None of that costs them a thing.

Now the same person, contracting

Take the same developer and put them on the £500 day rate, operating outside IR35 through their own limited company, which is the arrangement that makes contracting worth it.

The first correction is the biggest. Nobody bills 260 days a year. If you take the same 28 days of holiday plus bank holidays, you are already down to around 44 working weeks, and that assumes no gap between one contract ending and the next starting. At 220 billed days, £500 a day is £110,000 of company turnover, not £120,000. That £10,000 you never see is the price of the holiday your salaried self got paid for.

Out of that £110,000 the company pays for things an employer used to absorb. A contractor accountant runs about £1,500 a year, and professional indemnity plus public liability insurance is roughly another £500. You pay yourself a small salary, typically £12,570 to use up the personal allowance, and because the employer NI secondary threshold dropped to £5,000 a year from April 2025 under the rate rise HMRC brought in, the company owes 15 percent employer NI on the salary above that, which is about £1,135.

After salary, employer NI and those costs, the taxable company profit is around £94,300. Corporation tax on that is not the headline 25 percent, because profit between £50,000 and £250,000 gets marginal relief, per HMRC. The effective rate here works out near 22.5 percent, a corporation tax bill of about £21,240. That leaves roughly £73,060 of post tax profit to take as dividends.

Dividends have their own tax. The first £1,000 is covered by the dividend allowance for 2025/26. The slice that fits inside the basic rate band is taxed at 8.75 percent, and the rest, which pushes into the higher band, at 33.75 percent, using the HMRC dividend rates. On this profit that is roughly £15,140 of dividend tax.

Add it up. The salary of £12,570 plus dividends of £73,060 minus £15,140 in dividend tax leaves take home of about £70,480 a year. That lines up with what the mainstream contractor calculators quote for a £500 outside IR35 rate, which land in the £70,000 to £75,000 range.

What that £25,000 gap actually buys

So the contractor keeps around £70,480 and the employee keeps £45,357. The contractor is genuinely ahead by roughly £25,000 a year. That is real, and anyone who tells you contracting is always a wash is wrong. But look at what the £25,000 has to cover before you spend a penny of it.

There is no employer pension, so the £2,400 to £3,000 the salaried version got for free now comes out of your own pocket, though you can pay it efficiently through the company. There is no sick pay beyond nothing, because a limited company director outside IR35 does not qualify for SSP in any meaningful way. If you are off for three weeks, you bill nothing for three weeks.

Then there is the gap risk, which is the one people underestimate most. The 220 day assumption already spent your holiday. A single six week gap between contracts, which is completely normal, is 30 unbilled days, or £15,000 of that £25,000 cushion gone in one stretch of bad luck. Contracts also end fast. Many run on one week or two week notice, so the redundancy protection and notice period a permanent employee builds up after two years simply does not exist.

Once you subtract a self funded pension, a sensible buffer for one lean spell a year, and the value of the sick pay and job security you gave up, the £25,000 headline shrinks to something more like £8,000 to £12,000 of genuine extra reward for carrying all the risk yourself. Still worth having. Just not double the money.

Inside IR35 is a different game entirely

Everything above assumes outside IR35. If the same £500 role is deemed inside IR35, your income is taxed as employment income, you lose the salary and dividend split, and the fee often has employer NI at 15 percent deducted before you see it. The contractor calculators put take home for a £500 inside IR35 rate at roughly £57,000 to £60,000, once it runs through an umbrella company.

That is only about £12,000 to £15,000 above the permanent salary, and now you are paying that self funded pension and carrying the gap risk out of a much thinner margin, with none of the sick pay or security. Inside IR35 at the same day rate, the honest answer is that contracting barely beats the permanent job, and once a rough patch hits, it can lose. This is exactly why contractors fight so hard over their IR35 status, and why the first question to ask about any contract rate is not how big it is but whether it sits inside or outside.

The same trap, across the Channel

The mechanics differ by country, but the shape does not. In the Netherlands, the self employed, the zzp'ers, charged an average of about €81 an hour in 2025 according to sector rate surveys, which sounds spectacular next to a salaried role, while CBS figures put average annual self employed income closer to €48,000. The gap between the flashy rate and the modest yearly total is the same holiday, pension and gap risk showing up in a different currency. The Dutch even introduced a rough floor around €36 an hour from 2025, below which a worker can argue they are really an employee.

Wherever you are in Europe, the lesson holds. A day rate or an hourly rate is a gross business figure, not a salary. Comparing it straight to a permanent wage is comparing turnover to take home, and they are never the same number.

So which one should you take

If you are looking at an outside IR35 contract paying clearly more than the permanent equivalent, and you have three to six months of expenses saved to survive a gap, contracting genuinely pays more and gives you control over your time. If the contract is inside IR35, or the rate is only a little above the salary, or your savings would not cover a lean quarter, the permanent job is very likely the better deal once you count what it quietly hands you.

Run your own version of these numbers before you reply to that recruiter. Take the day rate, assume 220 billed days, subtract accountancy, insurance, your own pension and one unbilled month, then compare what is left with the salary plus its pension and paid holiday. Do that once and the £500 a day stops looking like twice the money, and starts looking like exactly what it is: a fair rate for a job with no safety net attached. When you know which side of that line you are on, tailor your CV to it, because a contractor's CV and a permanent hire's CV are selling two completely different things.