Contractor vs Permanent Salary Calculator UK: Payroll Guide

Choosing between a contractor day rate and a permanent salary is not just a take-home pay question.

For UK employers, recruiters, payroll teams, and contractors, the comparison should cover day rate, working days, holiday, pension, bonus, umbrella fees, employer National Insurance, IR35 status, and the practical payroll process behind the engagement.

Use the Workmax contractor vs permanent salary calculator to model the numbers, then use this guide to check the payroll and compliance assumptions behind the result.

Last reviewed: 2 July 2026 for 2026/27 UK payroll thresholds and current HMRC, GOV.UK, ACAS, The Pensions Regulator, and ONS guidance.

This is general payroll and workforce guidance, not legal, tax, accountancy, or financial advice. Check the latest official guidance and seek professional advice for high-value or uncertain engagements.

Quick answer

A contractor day rate normally needs to be higher than the permanent daily equivalent because the contractor may need to cover unpaid time, gaps between contracts, business costs, insurance, accountancy, employer-side costs passed through an umbrella assignment rate, and pension or holiday value that a permanent employee receives through payroll.

A permanent salary comparison should include:

base salary;
employer pension contribution;
bonus or commission if realistic;
paid annual leave already included in salary;
employer National Insurance and payroll cost for the employer;
employment rights and notice costs;
payroll administration, RTI, payslips, pension assessment, and records.

A contractor comparison should include:

day rate or hourly rate;
realistic paid working days;
inside IR35 or outside IR35 status;
umbrella company fee if relevant;
employer National Insurance or Apprenticeship Levy treatment if the assignment rate is used;
company costs for outside IR35 limited company work;
unpaid holiday, sickness, bench time, and gaps between assignments;
who is responsible for tax, payroll, and status determination.

The calculation becomes more useful when you separate three questions:

What is the cash comparison?
What is the payroll compliance route?
What risk or flexibility is each side accepting?

Worked example: GBP 600 per day vs GBP 90,000 salary

Imagine a contractor is offered GBP 600 per day and is comparing it with a GBP 90,000 permanent salary.

Assumptions:

contractor day rate: GBP 600;
working days: 223 days per year;
permanent salary: GBP 90,000;
employer pension on the permanent role: 5%;
bonus: 10% of salary;
inside IR35 route uses an umbrella assignment-rate style comparison;
outside IR35 route deducts company running costs separately.

Simple gross contractor income:

GBP 600 x 223 working days = GBP 133,800 annual contract value.

Permanent package before employer payroll on-costs:

GBP 90,000 salary;
GBP 4,500 employer pension contribution at 5%;
GBP 9,000 bonus at 10%;
package value before other benefits: GBP 103,500.

At first glance, GBP 133,800 looks well ahead of GBP 103,500. But the headline difference is not the final answer.

If the contractor is inside IR35 and the day rate is an assignment rate, employer-side costs may be deducted from the contract income pool before taxable pay is calculated. If the contractor is outside IR35, the contractor may still need to fund accountancy, insurance, software, company administration, unpaid holiday, and gaps between contracts.

The common payroll mistake is comparing GBP 600 x 260 weekdays with GBP 90,000 salary. That overstates the contract side because most contractors do not bill every weekday of the year. A realistic working-day assumption should allow for bank holidays, holiday, sickness, training, contract gaps, and sales time.

Run the scenario in the contractor vs permanent calculator and then stress test it with lower working days, a higher umbrella fee, no bonus, and a higher pension contribution.

IR35 changes the comparison

IR35 is the everyday name for the off-payroll working rules. GOV.UK explains that the rules are designed so that a worker who provides services through an intermediary, but would have been an employee if engaged directly, pays broadly the same Income Tax and National Insurance as an employee.

Useful official references:

For a calculator comparison, the key distinction is:

inside IR35: the engagement is treated like employment for tax. PAYE and National Insurance are generally handled by the fee-payer or payroll route in the chain.
outside IR35: the contractor is treated as genuinely in business on their own account for tax purposes, subject to the actual facts and contract.

This does not automatically decide employment rights. ACAS highlights that employment status for tax purposes is different from employment status for employment rights purposes. A person can be treated one way for tax and still need a separate legal assessment for rights.

Official ACAS reference: Types of employment status

Who decides IR35 status?

For medium and large private sector clients and public authorities, the client usually has responsibility for assessing whether the off-payroll working rules apply. GOV.UK's client guidance says organisations should take care with contracted-out services and should not relabel arrangements to avoid the rules.

For small private sector clients, responsibility can sit differently, so the parties should check the current HMRC position for the exact engagement.

For employers and recruiters, the practical checklist is:

Identify whether the worker provides services through an intermediary, such as a personal service company.
Decide who is responsible for the status determination.
Use CEST or professional advice where appropriate.
Keep the contract and the real working practices aligned.
Issue and retain status determination records where required.
Confirm the payroll route before the first invoice or timesheet is approved.

Inside IR35, umbrella, PAYE and assignment rates

Inside IR35 comparisons often confuse people because the day rate may be described in different ways.

An umbrella assignment rate is not the same as gross employee salary. It may include funds that need to cover employer National Insurance, Apprenticeship Levy where relevant, umbrella margin, and other employment costs before taxable gross pay is reached.

For 2026/27, GOV.UK's employer rates and thresholds page lists the Class 1 secondary threshold at GBP 5,000 per year and the GOV.UK National Insurance rates page confirms 15% employer Class 1A and Class 1B rates for 2026/27. The exact payroll treatment depends on the contract chain and payslip structure, so payroll should not assume the contractor receives the whole assignment rate as gross pay.

Official references:

If a contractor says "I have been offered GBP 600 per day inside IR35", payroll needs to confirm:

is GBP 600 the assignment rate or the worker's taxable gross day rate;
who pays employer National Insurance;
whether pension contributions are included;
whether holiday pay is accrued, advanced, or paid separately;
what umbrella margin is deducted;
how expenses are handled;
whether student loan or postgraduate loan deductions apply;
how payslips will explain the deductions.

Outside IR35 and limited company costs

Outside IR35 does not mean "no tax". It means the engagement is not treated as employment for tax under the off-payroll working rules, based on the facts of the engagement.

An outside IR35 contractor may still need to account for:

corporation tax;
salary and dividend extraction;
VAT registration and returns where relevant;
accountancy fees;
business insurance;
banking and software;
professional memberships;
equipment;
gaps between contracts;
unpaid holiday, training, sickness, and sales time.

The calculator should therefore model outside IR35 business costs rather than only multiplying day rate by 260.

Permanent salary costs employers should not ignore

For an employer, a permanent hire is not only gross salary.

Payroll and HR should budget for:

employer National Insurance;
workplace pension contributions;
payroll software or provider cost;
onboarding and right-to-work process;
holiday pay and absence management;
statutory payments where relevant;
notice period and leaver processing;
training, equipment, benefits, and management time.

Use the true cost of hire calculator for employer on-cost planning and the pension contribution calculator for pension modelling.

The Pensions Regulator says employers have automatic enrolment duties if they employ at least one person. That makes pension assessment part of the permanent employment comparison, not an optional afterthought.

Official reference: The Pensions Regulator employer duties and defining the workforce

Employer checklist before choosing contractor or permanent

Use this checklist before finance, HR, or the hiring manager signs off the route.

Define the business need: project delivery, permanent capacity, interim cover, specialist expertise, or urgent backfill.
Compare total cost, not just day rate vs salary.
Decide whether the role looks like employment in practice.
Check IR35 responsibility and run CEST or obtain advice where needed.
Confirm whether the day rate is assignment rate, taxable gross, or limited-company invoice value.
Model realistic working days and gaps.
Include pension, bonus, holiday, and employer National Insurance in the permanent comparison.
Agree who keeps timesheets, approvals, contracts, invoices, payslips, and status records.
Check whether the payroll system can handle off-payroll workers or umbrella data cleanly.
Review the decision if the working arrangement changes.

Common payroll mistake: one calculation for two legal routes

The biggest mistake is using one simple formula for every route:

day rate x 5 x 52 = annual contractor income.

That ignores the fact that a contractor can be:

a limited company contractor outside IR35;
an inside IR35 worker through an umbrella company;
an agency worker;
a fixed-term employee;
a direct PAYE employee;
a self-employed individual where the facts support it.

Each route has a different payroll workflow, payslip or invoice process, rights profile, pension position, and tax responsibility.

If the working arrangement changes, rerun the comparison. A contractor who starts outside IR35 but later works under the client's direct control, with no substitution and a long open-ended arrangement, may need reassessment.

What other guides and calculators often miss

Competitor and reference pages tend to focus on one part of the decision.

ContractorUK and contractor calculator tools often go deep on contractor take-home and equivalent salary. BrightPay documentation focuses on how off-payroll workers can be handled in payroll software. Sage explains the off-payroll working rules and the difference between inside and outside IR35. Xero's guide is useful on worker classification questions. PayFit's payroll material is stronger on employer payroll costs and National Insurance changes than on day-rate negotiation.

The gap for UK employers is a combined view:

a calculator for the money;
official-source checks for IR35, employment status, tax, and pensions;
a payroll handoff checklist;
clear treatment of assignment rate vs gross pay;
internal links to employer cost and pension tools.

That is the role of this guide and the Workmax calculator set.

Useful calculator links:

How Workmax connects the decision to payroll operations

Workmax helps UK employers connect HR, payroll, time, absence, expenses, employee records, and workforce workflows in one place.

That matters because contractor vs permanent decisions often fail at the handoff:

hiring agrees a rate but payroll does not know whether it is assignment rate or gross pay;
the contract says one thing but working practices show another;
timesheets are approved outside payroll;
pension and holiday assumptions are not captured;
status determination notes sit in email rather than the employee or worker record;
finance compares salary and day rate without employer on-costs.

Workmax is not a substitute for tax or legal advice, but it gives payroll and workforce teams a cleaner operating model once the route is chosen.

Start with Workmax payroll, then model the numbers with the contractor vs permanent salary calculator.

FAQ

What is a contractor vs permanent salary calculator?

A contractor vs permanent salary calculator compares contract day-rate income with a permanent salary package. A useful UK version should include working days, pension, bonus, holiday context, IR35 assumptions, umbrella or company costs, and estimated take-home pay where possible.

How do I convert a day rate to an annual salary?

Multiply the day rate by realistic billable working days, then compare that annual contract value with salary, pension, bonus, and paid leave. Do not automatically use 260 days. Many contractors bill fewer days because of holidays, bank holidays, sickness, training, contract gaps, and time spent finding the next assignment.

Is GBP 600 per day better than GBP 90,000 salary?

It can be, but it depends on IR35 status, billable days, pension, bonus, umbrella fees, employer-side deductions, business costs, and risk. GBP 600 x 223 days is GBP 133,800 gross contract value, but that is not the same as taxable pay or take-home pay in every route.

Does inside IR35 mean I am an employee?

Inside IR35 means the engagement is treated like employment for tax. It does not automatically give full employment rights. ACAS notes that tax status and employment-rights status are different tests, so employers should consider both.

Who pays employer National Insurance for inside IR35 contractors?

It depends on the fee-payer and contract chain. In many umbrella assignment-rate models, employer-side costs are funded from the assignment rate before taxable pay. Payroll should confirm whether the quoted rate is assignment rate or taxable gross pay before comparing it with salary.

Should employers use CEST for contractor decisions?

HMRC's CEST tool can help check whether a worker should be treated as employed or self-employed for tax and whether off-payroll working rules apply. It should be used with accurate facts about the real working arrangement, not only the written contract.

What should a permanent salary comparison include?

Include base salary, employer pension, bonus, paid annual leave context, employer National Insurance, payroll administration, benefits, equipment, notice costs, and the operational value of having permanent capacity.

What should an outside IR35 comparison include?

Include day rate, realistic working days, company costs, insurance, accountancy, unpaid time, tax extraction strategy, VAT where relevant, and professional advice. Outside IR35 is not a shortcut around tax; it is a status conclusion based on the engagement.

Can a contractor be cheaper than a permanent employee?

Yes, especially for short specialist projects, urgent cover, or work where permanent capacity is not needed. But the day rate alone does not prove it. Employers should compare total cost, duration, risk, knowledge retention, payroll complexity, and compliance obligations.

Which Workmax calculators help with this decision?

Start with the contractor vs permanent salary calculator. Then use the IR35 calculator, true cost of hire calculator, pension contribution calculator, and take-home pay calculator to test specific assumptions.