Contractor vs employee

Contractor vs employee cost UK (2025/26)

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 £59,063 per year including NI, pension and modest overheads. The equivalent contractor at a day rate of approximately £257 per day for 230 days costs £59,110 — 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. 2025/26 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: 04 April 2026. Not legal or tax advice. IR35 status depends on specific contract terms and working practices.