Contractor vs employee

Contractor vs employee cost UK (2026/27)

Choosing between a permanent employee and a contractor involves more than the headline day rate. A PAYE employee at £50,000 salary costs an employer approximately £61,063 per year including NI, pension and overheads. The equivalent contractor at a day rate of approximately £265 per day for 230 days costs £60,950 — similar on paper, but with very different risk profiles, IR35 implications, and ongoing commitments. This page breaks down both sides so you can make a properly costed decision.

PAYE employee vs contractor — cost comparison

Employee salary Employer NI Pension Total employer cost Equiv. day rate
£35,000 £4,500 £863 £43,363 £189/day
£50,000 £6,750 £1,313 £61,063 £265/day
£70,000 £9,750 £1,321 £84,071 £366/day
£100,000 £14,250 £1,321 £118,571 £516/day

Total employer cost includes £3,000 overheads. Day rate equivalent = total cost ÷ 230 working days. 2026/27 rates.

Key differences

PAYE employee

  • Employer NI at 15% above £5,000
  • Minimum pension 3%
  • Holiday pay (28 days statutory)
  • Sick pay obligations (SSP)
  • Unfair dismissal rights after 2 years
  • Employment Allowance available

Outside IR35 contractor

  • No employer NI on fees
  • No pension obligations
  • No holiday pay liability
  • No SSP
  • Day rate premium reflects these savings
  • IR35 assessment required (medium/large engagers)

Inside IR35 contractor

  • PAYE deductions apply
  • Employer NI at 15%
  • No holiday/sick pay rights
  • No unfair dismissal protection
  • Contractor retains flexibility
  • Costlier than outside IR35

Calculate your options

Calculate employee total cost What is Employment Allowance? Cost by salary Employer NI by salary First employee cost

Frequently asked questions

Is a contractor cheaper than an employee in the UK?
On a day-rate basis, a contractor often appears more expensive than an equivalent PAYE salary. However, the employer avoids employer NI (15%), pension contributions, holiday pay (up to 28 days/year), sick pay obligations, and statutory payments. For short-term or specialist work, a contractor can be cost-effective. For long-term, consistent roles, a permanent employee is usually more economical once day-rate premiums are accounted for.
What is IR35 and how does it affect contractor costs?
IR35 (the off-payroll working rules) determines whether a contractor working through a limited company should be treated as an employee for tax purposes. If a contractor is deemed inside IR35, the engaging business must deduct PAYE tax and employee NI, and pay employer NI at 15%, eliminating most of the tax efficiency of contracting. Large and medium businesses have been responsible for assessing IR35 status since April 2021. Small businesses (meeting two of three criteria: fewer than 50 employees, turnover below £10.2m, balance sheet below £5.1m) are exempt and the contractor assesses their own status.
What day rate is equivalent to a £50,000 salary?
A £50,000 salary costs an employer approximately £58,063 per year including NI and minimum pension (before overheads). At 230 working days per year, this equates to approximately £252 per day. A contractor day rate of £252 would therefore represent breakeven before accounting for the employer's overhead savings on holiday pay, sick pay, and employment admin. In practice, contractors command a premium above this breakeven figure.
Do employers pay NI on contractor payments?
Employers do not pay employer NI on payments to genuine self-employed contractors or limited company contractors working outside IR35. If the contractor is deemed inside IR35, the fee-payer (usually the engaging business for medium/large companies) must operate PAYE and pay employer NI at 15% on the deemed employment income.

UK only. Last reviewed: 18 August 2026. Not legal or tax advice. IR35 status depends on specific contract terms and working practices.

Written and reviewed by James Whitfield and the editorial team.

Every figure is checked against current HMRC and GOV.UK guidance and reviewed for the 2026/27 tax year. We explain the numbers in plain English with worked examples. Editorial standards · About us