Salary vs contracting calculator, 2026/27

How this is calculated

The employed side is a straightforward PAYE calculation: gross salary less income tax through the personal allowance, basic and higher rate bands, and employee National Insurance between the primary threshold and upper earnings limit and above it.

The contracting side deducts a small salary, employer's National Insurance on that salary, and running costs from gross contract income to reach taxable profit, applies corporation tax at the appropriate rate, then taxes the salary and remaining dividends personally using the same personal allowance (shared across both income types) plus the dividend allowance and dividend tax rates.

The two figures are genuinely comparable because both represent cash actually available to you after all UK taxes, rather than comparing a gross salary offer to a gross contract rate, which overstates the apparent gap.

Why contract income needs to be higher than salary

A contract rate needs to cover employer's National Insurance and the Apprenticeship Levy that an employer would otherwise absorb, plus your own pension contributions, sick pay, holiday pay and gaps between contracts, none of which are provided automatically when contracting.

As a very rough guide, a contract rate needs to be around 25 to 40% higher than an equivalent salary to leave you no worse off once these factors are included, though the exact figure depends heavily on your circumstances.

Non-financial factors worth weighing

Job security, statutory redundancy rights, career progression, training budgets and the ability to get a mortgage are all typically easier with a permanent salary. Contracting offers more flexibility and, for many, a higher net income, but with more variability year to year.

IR35 status is critical: if the contract role would be inside IR35, most of the tax advantage modelled here disappears, and the comparison moves much closer to employment.

How much higher should a contract rate be than a salary?

A common starting point is 25 to 40% higher in gross terms, to account for employer's National Insurance, lost benefits, gaps between contracts and running your own company, though the precise figure depends on your circumstances and appetite for risk.

Does this calculator include pension contributions?

No, this version compares take-home cash only. Employer pension contributions made by your limited company are a tax-efficient extra that would improve the contracting figure further, and should be added separately if relevant to you.

What if my contract would be inside IR35?

Use the off-payroll working rules calculator instead, since an inside-IR35 contract is taxed much more like employment and the corporation tax and dividend structure modelled here would not apply.

Are company running costs tax deductible?

Yes, legitimate running costs such as accountancy fees, business insurance and software are deductible against company profit before corporation tax is calculated, which is reflected in this calculator.