Side-by-side comparison
The pay comparison done honestly
The headline contractor day rate looks much higher than the salaried equivalent, but the figures need adjustment for a fair comparison. A £500/day contractor working 200 billable days makes £100,000 gross. To compare with a salaried role you need to subtract: no paid holiday (5-6 weeks of unbilled time, roughly 10% of revenue); no sick pay (3-5% on average); no employer pension contribution (typically 5-10% of salary; the contractor pays equivalent themselves from net); no employer NI (about 13.8% of salary that the contractor effectively absorbs); plus paying for training, software, accountancy, and inter-contract gaps.
After all of that, a £500/day contractor at 200 billable days is roughly equivalent to a £75,000-£85,000 salaried role with full benefits. Higher than the salaried, but not double. The premium compensates for the lack of structural protection and the variability of income.
When contracting makes financial sense
Three indicators that contracting pays off compared to employment for your situation: you can command a day rate well above the salaried equivalent (often the case in specialised technical fields, financial services, consulting); you have a strong network that produces contracts reliably, minimising inter-contract gaps; you have a stable household financial situation (partner income, low fixed costs) that absorbs income variability.
Where contracting is harder: early-career roles where the day rate doesn’t yet command a premium; sectors where most work is permanent and contracting is unusual; household situations with tight cash flow that struggles with variable income; people who genuinely value the structural predictability of employment.
The IR35 reality
IR35 is the single biggest variable in contractor finances. Since April 2021, most clients (not the contractor) decide IR35 status for the contract. Inside-IR35 contracts are taxed as employment via PAYE, which removes most of the tax efficiency of the limited company. Outside-IR35 contracts keep the tax benefits.
The financial difference between inside and outside IR35 on the same gross day rate is typically 20-25% of net take-home. A £500/day inside-IR35 contract nets roughly £75,000-£80,000 in take-home over a year of 200 billable days; the same contract outside IR35 nets £95,000-£105,000. Status matters.
For most genuine freelance and short-term contract work (multiple clients, your own equipment, control over how you work), outside IR35 is the norm. For long-term single-client contracts that look like full-time employment, inside IR35 is increasingly common since the 2021 reforms.
The non-financial trade-offs
Money matters but isn’t the only consideration. Things contracting gives you: control over what work you take, who you work with, when you work, where you work. Things contracting takes away: the social structure of a team, the long-term relationships with colleagues, the sense of shared mission, the simpler tax life.
People who thrive as long-term contractors tend to share some characteristics: comfortable with ambiguity, strong networks they actively maintain, willing to handle their own pension and tax planning, prefer optionality over predictability. People who go back to employment after contracting often cite the missing social and structural elements rather than the money.
Switching between them
The switch in either direction is straightforward mechanically but takes mental adjustment. Employee to contractor: form a limited company (24 hours), find an accountant, build a client pipeline, accept variable income. Contractor to employee: apply to roles, accept a salaried offer, close down the limited company or keep it dormant for future use.
Many UK professionals oscillate across a career: a few years as employee, a few as contractor, back again as life circumstances change. The skills transfer; the financial structures change. There’s no shame in either direction.
Frequently asked questions
- Do contractors earn more than employees?
- Generally yes per hour or per day, but the figures need adjustment. A £500/day contractor at 200 billable days earns £100,000 gross — but has no paid holiday, no sick pay, no employer pension contribution, no employer NI subsidy, and pays for their own training, software, and downtime between contracts. After all of that, contractors typically earn 20-50% more than salaried equivalents, not 2-3x.
- Is contracting more or less secure than employment?
- Less secure in the short term, sometimes more in the long term. Individual contracts can end with little notice; gaps between contracts are real. But experienced contractors with strong networks often have more career resilience than employees in narrow specialisations. The honest answer: contracting trades short-term predictability for longer-term flexibility.
- What's IR35 and how does it affect contractors?
- IR35 is HMRC's anti-avoidance rule for off-payroll working. Since April 2021, medium and large clients determine whether a contract is 'inside IR35' (taxed like employment) or 'outside IR35' (taxed as legitimate business). The difference is typically 20-25% of net take-home, so it's commercially significant. Most contractors check status before accepting any role.
- Can I be a contractor for one client long-term?
- Yes, but it raises IR35 risk. HMRC looks at indicators like whether you have other clients, control over how you work, your own equipment, financial risk you're taking on. A long-term single-client contract that looks indistinguishable from employment is likely inside IR35. The contract wording matters less than the day-to-day reality.
General information about the contractor vs employee distinction. For tax and IR35 questions specific to your situation, consult a contractor-specialist accountant.
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