The naive multiplier is wrong
Every contractor has had this conversation. A perm-job interviewer asks "what are you on now?", you say "£500 a day", they multiply by 260 working days, get £130,000 and look at you like you've asked for the moon. The mistake is on their side, not yours: 260 days is what an employee works in a year before taking annual leave, sick days, training and bank holidays. A contractor invoices a fraction of that — typically 230 days or so — and bears the cost of every non-working day directly. Map those costs back into a permanent equivalent and the £500/day contract converts to something closer to a £100,000 base salary, not £130,000.
This guide walks through the math both ways: from a day rate to its permanent-equivalent gross, and from a permanent salary to the day rate you'd need to charge to make a lateral move.
1. Where the 46-week year comes from
A standard UK contractor billing year is built from 52 weeks of calendar time minus:
- 8 bank holidays in England & Wales (≈ 1.6 weeks). Scotland has 9, Northern Ireland 10 — the differences are minor.
- 5–7 days of unbillable illness, appointments, training, proposal-writing (≈ 1 week).
- 4 weeks of unpaid leave — the contractor analogue of statutory annual leave. Some take more, some less.
52 − 1.6 − 1 − 4 ≈ 45–46 weeks. SalaryGrid uses 46 by default because most B2B contracts assume that figure. If your contract calls for a 50-week year (rare) or you plan to take only 2 weeks unpaid (also rare), override the figure in Advanced Settings on the Contractor Calculator.
2. From day rate to permanent-equivalent gross
The clean conversion is:
Annual gross ≈ Day rate × Days/week × Weeks/year
Default: rate × 5 × 46 = rate × 230
£500/day × 230 = £115,000 annual gross. This is the figure you'd put into a PAYE calculator to find the equivalent permanent-employee tax and take-home.
For an hourly rate the chain extends:
Annual gross ≈ Hourly rate × Hours/day × Days/week × Weeks/year
Default: rate × 8 × 5 × 46 = rate × 1,840
£65/hour × 1,840 = £119,600 annual gross.
3. The "permanent premium": what they're actually offering
A permanent role at the same headline pay number does not deliver the same total compensation. A permanent employee on £100,000 also receives, broadly:
- ~25 days paid leave + 8 bank holidays — call it 6.5 weeks of pay you receive without working. That's ~£12,500 of value at a £100k base.
- Statutory Sick Pay from day 4, currently £116.75 per week for up to 28 weeks. Modest, but the contractor gets £0 for the same period.
- Employer pension contribution — typically 5% under auto-enrolment, often 8–12% in tech / finance. At 8% of £100,000 that's £8,000 of pension a year, free.
- Employer National Insurance — paid by the employer at 15% of earnings above the secondary threshold. As a contractor your gross IS your true earnings, the employer NI is implicitly already accounted for. As an employee, the employer pays roughly £14,000 of NI on £100k of you, which doesn't appear anywhere on your payslip but is real compensation.
- Benefits-in-Kind — private medical, life cover, gym, season-ticket loans, EV salary sacrifice. Variable by employer; easily £5,000+ at senior levels.
- Bonus and equity — varies wildly. For market-cap-driven sectors it can dwarf base.
Rolled together, the typical permanent compensation premium over base salary is in the region of 25–40% for white-collar knowledge work. A £100,000 base + benefits is structurally comparable to a contractor billing about £130,000 gross — once you fund your own pension at 8% (£10,400), buy private medical (£1,500–£3,000), insure yourself against 28 weeks of illness (≈ £600/year), and price in the no-paid-leave gap (40% perm premium on 25 days of leave ≈ £8,000).
4. Worked example — £500/day, end-to-end
| Step | Figure |
|---|---|
| Day rate | £500 |
| Days/week (default) | 5 |
| Weeks/year (default 46) | 46 |
| Annual gross | £115,000 |
| Income tax (rUK, with PA taper) | £35,632 |
| Class 1 NI | £4,311 |
| Net take-home (outside IR35, PAYE-equivalent) | £75,057 |
£75,057 ÷ 230 ≈ £326 of net per working day invoiced. Your gross rate was £500 — about 65% of every invoiced pound is yours to keep before pension contributions and limited-company overheads. For the same £100,000 base employee, after auto-enrolment pension and the same band structure, take-home lands roughly at £67,000 — but with the £20,000–£35,000 of benefits the contractor self-funds.
5. Going the other direction
Leaving a perm role for contracting? The day rate you need to match your total compensation is roughly:
Day rate ≈ (Permanent gross × 1.30) ÷ 230
The 1.30 is the typical premium-to-base multiplier for a standard benefits package. For a £80,000 base perm role, that's roughly (£80,000 × 1.30) ÷ 230 ≈ £452/day to match. If the perm offer has unusual upside (large bonus, RSUs at a public company, exceptional pension match), nudge the multiplier higher.
6. The IR35 footnote
All the math above models contractor pay as if it flowed straight into PAYE at the same rate as a permanent employee — i.e. inside-IR35 deemed-payment basis, or umbrella-style billing. Outside-IR35 contractors operating through a limited company can split between low salary and dividends, deduct allowable business expenses, and front-load employer pension contributions — all of which materially shifts the comparison. SalaryGrid does not model that mode; for out-of-scope advice, see a contractor accountant.
7. Overtime for hourly employees
Hourly employees (rather than independent contractors) sit between the two worlds. Use the same chain:
- Base earnings: rate × hours/day × days/week × weeks/year.
- Overtime at 1.5× (time-and-a-half): rate × 1.5 × overtime-hours-per-week × weeks/year.
- Overtime at 2× (double time): rate × 2 × overtime-hours-per-week × weeks/year.
These three lines sum to the annual gross. From there it's the same PAYE engine. The Hourly & Contractor Calculator has dedicated fields for both overtime tiers inside Advanced Settings.
The take-away
A day rate looks like a big number. Once you subtract the value of paid leave, employer pension, NI, sick pay and benefits that you'd have received as a permanent employee, the gap between a £500/day contract and a £85,000 perm offer is much narrower than the headline suggests. Don't compare day rates to base salaries; compare them to total compensation.
Try it: open the Contractor Calculator with your current rate, then click "Analyse complete PAYE deductions framework for this salary →" to switch into the Salary Calculator with the equivalent gross pre-loaded.