PAYE Employee vs Ltd Company Contractor
Frequently Asked Questions
Typically 20-35% more take-home pay outside IR35, depending on income level. The difference has narrowed since the corporation tax increases in 2023 and employer NIC rises in 2025.
As a rough guide, divide annual salary by 230 working days. £60,000 ÷ 230 ≈ £261/day. However, contractors earn their full rate without employer NIC being paid on their behalf, so the equivalent value is higher.
No. Contractors outside IR35 are not entitled to sick pay, holiday pay, employer pension contributions, or employment law protections. These must be factored into the day rate premium.
A rule of thumb: add 25-30% for taxes and NIC plus 15-20% for no employment benefits (holidays, sick pay, pension). Effectively, multiply the equivalent salary daily rate by 1.4-1.5.
Inside IR35, contractors are taxed like employees. The take-home advantage largely disappears, and the administrative costs of running a limited company often make umbrella simpler.
Not really. Employees get pension contributions, sick pay, holiday pay, job security, and employment law protections — these have significant financial value not captured in a raw take-home comparison.
Contractors bear risk of IR35 reclassification, income gaps between contracts, no employment rights, administrative responsibility, professional indemnity insurance costs, and potential HMRC investigations.
Some professionals use 'portfolio working' — part employed, part contracting. This can balance security with tax efficiency, though it requires careful structuring.
Contractors with turnover above the VAT threshold (£90,000 from April 2024) must register for VAT. Most B2B contractors register voluntarily even below the threshold. Flat Rate Scheme may be beneficial for small contractors.
Many clients require it. Professional indemnity insurance (PI), public liability, and employers' liability (if you have employees) are standard contractor requirements and legitimate business expenses.
HMRC's CEST (Check Employment Status for Tax) tool, substitution rights, financial risk, control over work, and integration into the client's business are key factors. A properly drafted contract and genuine working practices are essential.
Most tax advisers recommend paying a salary equal to the personal allowance (£12,570) or just above the lower earnings limit (£6,396) to preserve NIC state benefit credits without triggering excessive PAYE or employer NIC.