£
Convert between annual salary and contractor day rate — with the true contractor premium needed to match PAYE take-home
The basic conversion divides annual salary by working days. But contractors fund costs that employers cover for employees — so the true equivalent day rate is always higher than the basic conversion suggests.
When you are employed, your employer pays:
As a contractor, all these costs come out of your day rate. This is why contractors earn more per day than an equivalent employed salary — not because contractors are overpaid, but because they fund their own employment costs.
To end up with the same take-home pay as an equivalent PAYE employee, contractors typically need a day rate that is 30–50% higher than the basic salary-to-day conversion. The exact premium depends on how many days you work, what structure you use, and whether you are inside or outside IR35.
UK day-rate contracting via a Personal Service Company (PSC) — typically a limited company that you own and operate — has been transformed by IR35 reforms (specifically Chapter 10 of ITEPA 2003 for off-payroll working). Under current rules, end-clients (or their fee-paying agencies) are responsible for determining whether a contract falls "inside IR35" (deemed employment, taxed as such) or "outside IR35" (genuine self-employment).
An "inside IR35" contract is treated like employment for tax purposes: the day rate is gross-equivalent salary, with income tax and employee + employer NI deducted at source. A £500/day rate inside IR35, worked 200 days/year, produces about £100,000 gross — after IR35 deductions (approximate average 30-35% combined), net take-home is around £65,000-70,000/year. Apprenticeship Levy adds another 0.5% above £15,000/year (for large employers). The contractor receives no employee benefits, holiday pay, or pension contributions from the client.
An "outside IR35" contract lets you operate through your PSC normally: bill the client gross, take a small salary (£9,100/year as discussed in the dividend tax calculator section), and distribute remaining post-Corporation-Tax profits as dividends. The same £500/day × 200 days = £100,000 gross to the PSC. After £25,000 Corporation Tax (at 25% main rate for profits over £50,000; lower at small-profit rate), about £73,000 of dividends + £9,100 salary becomes personal income. Net take-home after income tax + dividend tax is typically £65,000-£72,000, depending on dividend allowance usage.
The net-of-tax comparison: outside IR35 typically delivers 5-15% more take-home than inside IR35 for the same day rate, plus the flexibility to retain profits in the company for tax-deferral or expansion. But inside IR35 has its own benefits: no IR35 risk, no need to maintain a limited company, and freedom to focus on the contract rather than administration. The choice depends on client mix, willingness to manage a PSC, and risk appetite. Key 2026/27 IR35 marker: contracts with public-sector or large/medium-sized private clients determine status; small-client PSCs determine their own status (the long-standing rule).