Comparison · Contractors & Employment · 2026/27
Employed vs Contractor Tax Comparison 2026/27: Real Numbers
At £80,000 gross, a PAYE employee takes home around £56,400 in cash. After the April 2026 dividend tax rise, a contractor via a limited company outside IR35 nets a similar ~£55,000 in cash — the contractor edge now comes mainly from routing profit into an employer pension, lifting total value to roughly £60,000–£65,000. The same contractor caught inside IR35 takes home roughly the same as the employee, without the employee rights. An umbrella contractor fares worst of all at ~£51,000–£52,000. This guide puts all four scenarios side by side with real 2026/27 numbers, then examines the hidden costs, career risks and circumstances where each structure makes sense.
TL;DR — Take-Home at £80,000 Gross
- • PAYE employee: ~£56,400 net cash take-home
- • Ltd company, outside IR35: ~£55,000 cash, rising to ~£60,000–£65,000 total value once profit is routed into an employer pension
- • Ltd company, inside IR35: ~£54,000 (same as PAYE, fewer rights)
- • Umbrella contractor: ~£51,000–£52,000 (after umbrella fees and employers' NI deduction)
2026/27 Key Tax Rates Used
| Rate / Threshold | 2026/27 Figure |
|---|---|
| Personal Allowance | £12,570 |
| Basic rate income tax (20%) | £12,571 – £50,270 |
| Higher rate income tax (40%) | £50,271 – £125,140 |
| Employee NI (Class 1) | 8% on £12,570–£50,270; 2% above |
| Employer NI (Class 1) | 15% on salary above £5,000 |
| Dividend allowance | £500 |
| Basic rate dividend tax | 10.75% |
| Higher rate dividend tax | 35.75% |
| Corporation tax (small profits, ≤£50k) | 19% |
| Corporation tax (main rate, >£250k) | 25% |
Scenario A: PAYE Employee at £80,000
A permanent employee earning £80,000 salary, no benefits in kind, standard 5% employer pension contribution (salary sacrifice reducing gross to £76,000 after sacrifice — though we use the basic case without pension sacrifice here for comparability).
| Item | Calculation | Amount |
|---|---|---|
| Gross salary | — | £80,000 |
| Income tax | 20% × £37,700 + 40% × £29,730 | £19,432 |
| Employee NI (Class 1) | 8% × (£50,270–£12,570) + 2% × (£80,000–£50,270) | £3,602 + £594 = £4,196 |
| Employer NI (paid by employer) | 15% × (£80,000–£5,000) | £11,250 (employer cost) |
| Net take-home | £80,000 − £19,432 − £4,196 | £56,372 |
| Total employer cost | £80,000 + £11,250 | £91,250 |
| Effective marginal rate | Tax + employee NI / gross | 29.5% |
Figures for England/Wales. Does not include student loan, pension contributions, or salary sacrifice.
Employment benefits included (not in take-home but have value):
- • Statutory Sick Pay (up to 28 weeks at £123.25/week in 2026/27)
- • Paid holiday entitlement (minimum 28 days including bank holidays)
- • Employer pension contribution (typically 3–10% of salary)
- • Employment law protections (unfair dismissal, redundancy pay)
- • Potential employer life insurance, health insurance, bonus
Scenario B: Ltd Company Contractor, Outside IR35, £80,000
Contractor invoices £80,000 through their personal service company (PSC). The company pays a salary of £12,570 (Personal Allowance level) and distributes remaining post-tax profit as dividends. We assume small profits rate CT (19%) applies and no Employment Allowance (sole director).
| Item | Calculation | Amount |
|---|---|---|
| Company revenue | — | £80,000 |
| Salary paid | At Personal Allowance level | £12,570 |
| Employer NI on salary | 15% × (£12,570–£5,000) | £1,136 |
| Allowable expenses (est.) | Accountancy, insurance, home office | £3,000 |
| Taxable company profit | £80,000 − £12,570 − £1,136 − £3,000 | £63,294 |
| Corporation tax (19%) | 19% × £63,294 | £12,026 |
| Distributable profit (dividends) | £63,294 − £12,026 | £51,268 |
| Dividend tax | 10.75% × (£37,700 of basic rate) + 35.75% × (£13,568 higher rate), minus £500 allowance | ~£8,850 |
| Income tax on salary | £12,570 within PA | £0 |
| Net take-home | £12,570 salary + £51,268 dividends − £8,850 div tax | ~£54,988 |
| With pension contribution (£5k) | Employer pension saves CT and reduces div tax | ~£60,000+ total benefit |
Net take-home includes salary + dividends after all personal tax. Adding a £5,000 employer pension contribution reduces CT by £950, avoids ~£1,250 in div tax, and provides £5,000 in pension — total personal benefit approximately £60,000–£62,000 equivalent value.
Scenario C: Ltd Company, Inside IR35, £80,000
When a contract is inside IR35, the entire fee is treated as deemed salary. The company must operate a “deemed payment” calculation deducting employers' NI and 5% expenses allowance before arriving at the deemed salary. The director cannot pay dividends from that engagement's income.
| Item | Calculation | Amount |
|---|---|---|
| Gross contract income | — | £80,000 |
| 5% expenses allowance | 5% × £80,000 | £4,000 |
| Less employer NI on deemed payment | ~15% of gross less allowance | ~£10,200 |
| Deemed employment income | £80,000 − £4,000 − £10,200 | ~£65,800 |
| Income tax on deemed salary | 20% × £37,700 + 40% × £15,530 | ~£13,752 |
| Employee NI on deemed salary | 8% × £37,700 + 2% × £15,530 | ~£3,327 |
| Net take-home | £65,800 − £13,752 − £3,327 | ~£48,700 |
IR35 deemed payment calculation is complex; figures are illustrative. The net result approximates PAYE employment but without Statutory Sick Pay, employer pension, or employment law rights. Some contractors retain a portion for administration, which marginally improves the figure.
Scenario D: Umbrella Contractor, £80,000
An umbrella company employs the contractor and invoices the client. The gross contract rate must cover both employers' NI and the umbrella fee. If the agency quotes £80,000 as the “assignment rate,” the umbrella deducts employers' NI and its fee before the remainder is paid as PAYE salary.
| Item | Calculation | Amount |
|---|---|---|
| Gross assignment rate | — | £80,000 |
| Umbrella fee | ~£35/week × 46 weeks | ~£1,610 |
| Employer NI (deducted from assignment rate) | ~£10,200 | £10,200 |
| Employer pension (auto-enrolment 3% min) | 3% × ~£66k gross salary | ~£1,980 |
| Gross PAYE salary | £80,000 − £1,610 − £10,200 − £1,980 | ~£66,210 |
| Income tax | 20% × £37,700 + 40% × £16,140 | ~£13,996 |
| Employee NI | 8% × £37,700 + 2% × £16,140 | ~£3,345 |
| Net take-home (cash) | £66,210 − £13,996 − £3,345 | ~£48,869 |
| Pension (employer min) | ~£1,980 into pension | +£1,980 |
| Total value (cash + pension) | — | ~£50,849 |
Umbrella fees vary widely (£20–£75/week). Employer NI is deducted from the gross assignment rate in most umbrella structures. Figures are illustrative.
Summary Comparison at £80,000 Gross
| Metric | PAYE | Ltd / Outside IR35 | Ltd / Inside IR35 | Umbrella |
|---|---|---|---|---|
| Net cash take-home | ~£56,400 | ~£55,000 (cash only) | ~£48,700 | ~£48,900 |
| With pension value | ~£60,000+ (employer match) | ~£60,000–£65,000 | ~£48,700 | ~£50,900 |
| Employer NI paid | By employer (£11,250) | By company (£1,136) | Deducted from gross | Deducted from assignment |
| Holiday pay | Yes (28 days min) | None (self-fund) | None | Yes (accrued) |
| Statutory Sick Pay | Yes | None | None | Yes (employed) |
| Employer pension | Typically 3–10% | Self-funded (tax-efficient) | None typically | 3% minimum (auto-enrol) |
| Redundancy rights | Yes (2yr+) | No | No | Yes |
| Admin burden | None | High (company + SA) | Medium | Low |
Hidden Costs of Contracting
The financial advantage of outside-IR35 contracting is eroded by costs that PAYE employees never face:
| Cost | Typical annual range | Notes |
|---|---|---|
| Accountancy fees | £1,000–£3,000 | Company accounts, SA return, payroll |
| Professional indemnity insurance | £300–£1,500 | Required by most clients |
| Employers' liability insurance | £200–£600 | Legally required if employing anyone |
| IR35 contract review | £200–£500 per contract | Per engagement assessment |
| Tax investigation insurance | £100–£300 | Covers HMRC enquiry adviser fees |
| Income protection insurance | £500–£2,000 | Replaces SSP; optional but important |
| Between-contract income gaps | 1–6 weeks/year average | Lost income not covered by employer |
| Total estimated overhead | £3,000–£8,000/year | Before accounting for income gaps |
A contractor whose total value (cash plus employer pension) appears £4,000–£8,000 higher per year than an equivalent employee may in reality retain little or no cash advantage once hidden costs are factored in — and may earn less in years with significant bench time. After the April 2026 dividend tax rise, the outside-IR35 edge over PAYE is now driven almost entirely by pension efficiency rather than by higher cash take-home.
Career and Security Considerations
Beyond the tax numbers, contracting versus employment involves significant non-financial trade-offs:
- • No guaranteed income between contracts
- • No employer pension matching
- • No Statutory Sick Pay (without income protection insurance)
- • No Statutory Maternity/Paternity Pay unless arranged
- • Mortgage lenders may require 2 years of accounts
- • IR35 risk creates uncertainty on future income structure
- • Responsibility for own professional development, training costs
- • Higher day rates than equivalent permanent salary
- • Tax efficiency outside IR35
- • Career flexibility — move between industries/roles
- • Company pension entirely self-directed
- • Allowable expenses reduce taxable profit
- • Potentially easier to work part-time or take career breaks
Verdict: Financial / Security / Flexibility Grid
| Dimension | PAYE Employee | Ltd / Outside IR35 | Umbrella |
|---|---|---|---|
| Financial (net take-home) | Medium — £56k cash + employer benefits | Best — £60–65k equiv (before hidden costs) | Worst — ~£51k cash |
| Security (income certainty) | Best — continuous guaranteed salary | Worst — income gaps, IR35 risk, no rights | Medium — employed, but contract can end |
| Flexibility (work/career) | Lowest — notice periods, policies | Highest — choose contracts, take breaks | Medium — short engagements, move easily |