A day rate always looks generous next to a salary. A permanent role paying £60,000 works out at about £230 for each of the 260 weekdays in a year, so a contract at £350 a day seems like a big step up. The calculator above shows why the real comparison is closer than that. This guide looks at the part contractors find hardest to judge: the time between contracts.
Start from the whole permanent package
A permanent salary is only part of what an employee receives. Most permanent roles include paid holidays and bank holidays, an employer pension contribution, sick pay, and sometimes a bonus, private medical cover or training. A contractor pays for all of these from their day rate, or goes without.
Take a permanent offer of £60,000 with a 10% employer pension contribution. Before counting anything else, the package is worth about £66,000 a year. To earn that over the roughly 220 working days left after holidays and bank holidays, a contractor needs about £300 a day. That's the rate at which contracting just breaks even with the permanent job, assuming no gaps.
Then allow for the gaps
Very few contractors bill 220 days every year. Contracts end, searches take time, and many people take more holiday when they can. If you expect around two months a year without work, you'll bill closer to 180 days. At that level the break-even rate rises to about £367 a day. Add business costs, such as professional insurance, an accountant, equipment and training, and the rate needed to match the permanent job climbs further.
This is why experienced contractors set their minimum rate from their expected billable days, not from a 260-day year. A rate that looks generous on a 220-day assumption can leave you worse off than a permanent job if the gaps turn out to be longer.
Budgeting between contracts
The practical answer is to treat a share of every invoice as belonging to the quiet months. A common approach is to pay yourself a steady monthly amount and leave the rest in the business, or in savings, until the year's work is known. Keep enough to cover three to six months of personal spending. That buffer turns a gap between contracts from a crisis into a planned break.
Pensions need the same discipline. No employer is paying into your pension, so set up regular contributions yourself. If you work through your own limited company outside IR35, employer pension contributions paid by the company can be a tax-efficient way to do it. Inside IR35 or through an umbrella, a personal pension or a salary sacrifice arrangement with the umbrella does the job.
When IR35 changes the sums
If a contract is inside IR35, you're taxed broadly like an employee but without the employee benefits, and if you're paid through an umbrella company, employer National Insurance and other costs come out of your rate before your own tax. Inside IR35 work therefore needs a much higher day rate to match the same permanent package. Always ask the client or agency whether a role is inside or outside IR35 before you compare rates, because the same number can mean very different take-home pay.
Rate reviews and long contracts
Contract rates rarely rise automatically. On a long contract or a series of extensions, a rate that was competitive at the start can fall behind permanent pay, which usually rises each year. Ask for a review at each extension, using current market rates and your own track record. Even a modest increase compounds over a multi-year engagement, and it's much easier to negotiate when the client wants you to stay than at the start of a new search.
Next steps
Enter a day rate or a salary above to convert between them with your own billable days. If a contract is inside IR35, the umbrella and IR35 take-home calculator shows how much of the rate reaches you, and the required salary calculator works backwards from the take-home pay you need.