How is corporation tax calculated for a Ltd company contractor?

In 2025/26, corporation tax is 19% on profits up to £50,000, 25% on profits above £250,000, with marginal relief between. Most contractor Ltd companies fall in the 19% small profits rate bracket. You deduct allowable expenses and director salary before calculating taxable profit.

How do I calculate the permanent equivalent salary from my day rate?

A common rule of thumb is: multiply day rate by 220 to 230 days, then multiply by 0.7 to 0.75 to account for contractor overhead and benefits gap. For example, £500/day × 230 = £115,000 gross contract revenue; a broadly equivalent permanent salary might be around £75,000–£85,000 including benefits.

Should I include employer NI in the permanent comparison?

Employer NI is a cost to the permanent employer, not to you directly. However, when comparing total cost of employment to a company versus a contractor, employer NI (13.8% above £9,100) is relevant — it is an extra £5,000–£8,000 on a £50,000–£70,000 salary. Contractors avoid this for themselves as a Ltd company director paying dividends.

What holiday pay entitlement do contractors typically lose?

Ltd company contractors do not receive paid holiday — every day not billed is a day of revenue lost. At £400/day, 20 days holiday costs £8,000 in foregone revenue. This is why the contractor premium must include a holiday allowance equivalent, often calculated as 5.6 weeks × daily rate.

How accurate is this calculator?

This calculator provides a close approximation using 2025/26 tax bands, NI thresholds and dividend allowances. It does not account for all individual circumstances including tax carry-forwards, losses, specific benefit valuations, or complex remuneration arrangements. Consult a qualified accountant for a full personal calculation.

How does the comparison change at higher day rates?

At higher day rates (£600+), the contractor benefit from corporation tax and dividend rates becomes more pronounced. The marginal income tax on dividends (33.75% higher rate) is lower than the 40% higher rate on employment income. However, the dividend allowance reduction means the absolute saving is smaller than it was a few years ago.

What is the permanent equivalent of a £500 day rate?

A £500/day rate across 230 days = £115,000 gross revenue. After business expenses (say £5,000), that leaves £110,000 for salary and profit. After optimal extraction (salary £12,570, remaining as dividends after 19% corporation tax), typical take-home is around £80,000–£85,000. The equivalent permanent role would need to pay around £110,000–£120,000 gross to match this after benefits.

Do I get SSP or maternity pay as a contractor?

Ltd company directors are entitled to Statutory Sick Pay (£116.75/week for up to 28 weeks) and Statutory Maternity/Paternity Pay, but these are funded through employer NI relief mechanisms. The amounts are far lower than occupational sick pay or enhanced maternity pay available to permanent employees — another benefit gap to factor into your comparison.

What happens to pension if I go permanent?

Permanent employees are auto-enrolled into a workplace pension scheme with a minimum employer contribution of 3% (on qualifying earnings). Many employers contribute 5–10% or match higher employee contributions. This is a concrete, quantifiable benefit that should be added to the permanent package when making your comparison.

How do I calculate the total permanent compensation package value?

Start with gross salary. Add: employer pension contribution (salary × employer pension %), cash value of holiday beyond 28 statutory days, private health insurance annual cost to employer, income protection premiums, and any bonus or profit-share expectations. The sum is your Total Compensation Package, which should be compared to the contractor annual net take-home plus the value you assign to flexibility.

Where can I get advice on contractor vs permanent decisions?

HMRC publishes guidance on IR35 (off-payroll working rules) at gov.uk. The IPSE (Association of Independent Professionals and the Self-Employed) provides resources for contractors. For a personalised financial comparison, consult a chartered accountant or contractor specialist accountant.

What is the 2025/26 dividend tax rate for higher rate taxpayers?

Higher rate taxpayers pay 33.75% on dividends above the £500 allowance in 2025/26. Basic rate taxpayers pay 8.75%. Additional rate taxpayers pay 39.35%. For a contractor extracting most profit as dividends with a basic rate director salary, dividends that push total income above £50,270 are subject to the 33.75% higher rate.

Contractor vs Permanent Employee Calculator 2025/26

Q: Why use 230 working days for contractors?

Contractors typically lose 20 days to holiday, 10 days to bank holidays, and up to 15 days to marketing, business development and admin time. 230 days is a common industry benchmark, but some contractors in high-demand roles may bill 240+ days, while others in competitive markets may bill fewer than 200.

Q: What is the optimal Ltd company salary in 2025/26?

The most common optimal strategy is to pay yourself a salary equal to the personal allowance (£12,570) — this is below the NI secondary threshold so the company pays no employer NI — then extract remaining profits as dividends. However, some contractors use the NI secondary threshold (£9,100) as the salary level if they have other income.

Q: Does IR35 affect this calculation?

Yes, significantly. If you are inside IR35, you are treated as a deemed employee for tax purposes. Income is subject to income tax and NI as if employed, removing the benefit of dividends and corporation tax planning. An inside IR35 day rate needs to be considerably higher to match an outside IR35 equivalent.

Contractor vs Permanent Comparison

Contractor day rate (£)

Working days billed per year

Business expenses — annual (£)

Permanent salary offered (£)

Employer pension contribution (%)

Other benefits annual value (£)

Tax band (for both scenarios)

Contractor (Ltd Company) Route

Gross annual revenue

Less allowable expenses

Director salary drawn

Corporation tax (19%)

Net dividends (after dividend tax)

Contractor annual take-home

Permanent Employee Route

Gross salary

Income tax

Employee NI

Permanent net take-home

Employer pension contribution

Other benefits value

Total compensation package

Comparison

Take-home advantage (contractor vs perm)

Permanent day rate equivalent (salary ÷ 230)

Breakeven day rate (to match perm total comp)

Based on 2025/26 tax rates. Contractor route assumes outside IR35, Ltd company with optimal salary/dividend extraction. Director salary set at personal allowance (£12,570). Does not account for all individual circumstances — consult a qualified accountant.

How to Compare Contractor and Permanent Pay

The headline day rate is not the same as take-home pay. A £500/day contract rate sounds lucrative, but once you account for non-billable days, business expenses, accountancy fees and the absence of employer pension and paid holiday, the true comparison is more nuanced.

Use this calculator to run both scenarios side by side with 2025/26 tax rates and NI thresholds so you make your decision on real numbers.

The Contractor Ltd Company Route

Operating through a Ltd company allows you to split income between salary and dividends. A salary at the personal allowance threshold (£12,570) means no income tax and no NI on that portion. Remaining profits after corporation tax (19%) are extracted as dividends, taxed at 8.75% (basic rate) or 33.75% (higher rate) — lower than the equivalent employment income tax rates.

Dividend allowance 2025/26: £500 (tax-free)
Basic rate dividend tax: 8.75%
Higher rate dividend tax: 33.75%
Corporation tax on profits up to £50,000: 19%

The Permanent Employee Package

A permanent role offers more than just gross salary. Employer pension contributions (3% minimum under auto-enrolment, often 5–10%), paid holiday, private health insurance, income protection, and enhanced maternity/paternity pay are all real financial benefits that contractors must fund themselves.

The Breakeven Day Rate Concept

The breakeven day rate is the minimum day rate at which contracting produces the same net financial outcome as the permanent role. Below the breakeven rate, the permanent role is financially superior when benefits are included. Above it, contracting pays more — but you must value the additional flexibility appropriately for your circumstances.

Frequently Asked Questions

How do I compare a contractor day rate to a permanent salary? +

Multiply your day rate by working days per year (typically 230 accounting for holidays and admin time). Subtract allowable business expenses, then apply the optimal Ltd company extraction strategy — salary to the personal allowance (£12,570) plus dividends. Compare net take-home to the permanent salary after income tax and employee NI.

Why use 230 working days for contractors? +

Contractors typically lose 20 days to holiday, 8 to bank holidays, and up to 15 days to marketing, business development and admin. 230 days is a common industry benchmark. Some contractors in high-demand roles bill 240+ days; others in competitive markets may bill fewer than 200.

What is the optimal Ltd company salary in 2025/26? +

The most common strategy is to pay yourself the personal allowance (£12,570) — no income tax and no employer NI at this level. Remaining profits after corporation tax are extracted as dividends. Some contractors use the NI secondary threshold (£9,100) if they have other income.

Does IR35 affect this calculation? +

Yes — significantly. If you are inside IR35, you are taxed as a deemed employee. Income is subject to income tax and NI as if employed, removing the dividend and corporation tax advantage. An inside IR35 day rate needs to be considerably higher to match an outside IR35 equivalent.

What counts as an allowable business expense? +

Allowable expenses include professional indemnity and public liability insurance, accountancy fees, professional subscriptions, business phone and broadband (proportion), IT equipment wholly for work, travel to client sites, and training directly related to current contracts.

How do permanent employee benefits affect the comparison? +

Permanent roles often include employer pension contributions (3–10% of salary), 28 days paid holiday (worth roughly 10.8% of salary), private health insurance (£500–£2,000/year), and income protection. These can add 20–35% above gross salary to the total compensation package value.

What is the breakeven day rate? +

The breakeven day rate is the minimum contract day rate needed to match a permanent role's net take-home plus benefits. It accounts for contractor overheads, benefits gaps, unpaid holiday and self-funded pension. It is typically 25–40% above the raw salary-equivalent day rate.

Can I contribute to a pension from my Ltd company? +

Yes. Employer pension contributions from your Ltd company are an allowable business expense, reducing corporation tax. You can contribute up to £60,000 gross per year (or 100% of earnings if lower). This is often more tax-efficient than personal contributions.

What is the 2025/26 dividend allowance? +

The dividend allowance is £500 for 2025/26. Dividends above this threshold are taxed at 8.75% (basic rate), 33.75% (higher rate) or 39.35% (additional rate). The reduction from £2,000 has significantly reduced the contractor Ltd company advantage at higher income levels.

What overheads should contractors budget for annually? +

Typical annual overheads: accountancy (£1,000–£2,500), professional indemnity insurance (£300–£1,500), public liability (£150–£400), professional subscriptions (£200–£500), business banking (£100–£300). Total: approximately £2,000–£5,000 per year.

Do I get SSP or maternity pay as a Ltd company contractor? +

Ltd company directors are eligible for Statutory Sick Pay (£116.75/week for up to 28 weeks) and Statutory Maternity/Paternity Pay, but amounts are far lower than occupational sick pay or enhanced maternity/paternity pay available to permanent employees — a significant benefit gap to factor in.

Is contracting worth it financially? +

For roles commanding £350+/day outside IR35, contracting typically produces higher net income than an equivalent permanent role. However, weigh the premium against lack of employment security, no paid holiday, no employer pension, and the admin overhead of running a Ltd company. Breakeven calculations like this one help you make an informed decision.