"£500 a day? That's £125k a year!" It isn't. Contractor day rates look huge next to salaries because they have to pay for things a salary gives you for free.
The naive maths
day rate × 5 days × 52 weeks = 500 × 260 = 130,000
That assumes you work every weekday of the year, never get sick, and never wait between contracts.
Realistic billable days
| Days | |
|---|---|
| Weekdays in a year | ~260 |
| Public holidays | −8 to −13 (country dependent) |
| Personal holiday | −20 to −25 |
| Sick days | −5 |
| Training / admin / sales | −5 to −10 |
| Gaps between contracts | −10 to −30 |
| Billable days | ~190–215 |
What a permanent salary includes that a day rate doesn't
- Paid holiday and public holidays
- Sick pay
- Employer pension contributions
- Employer social contributions (e.g. UK employer National Insurance)
- Equipment, training, insurance
- Job security and notice periods
A better formula
equivalent salary ≈ (day rate × billable days − business costs) ÷ (1 + benefits uplift)
Where benefits uplift approximates the value of pension, employer contributions, and other benefits on top of salary. People commonly use something in the 15–30% range, but calculate your own.
Example (illustrative): £500/day, 205 billable days, £5,000 costs, 20% uplift:
(500 × 205 − 5,000) ÷ 1.20 = (102,500 − 5,000) ÷ 1.20 ≈ £81,250
So £500/day is roughly comparable to an ~£80k permanent package under these assumptions, not £125k.
You can sanity-check hourly figures with my Salary to Hourly calculator. A dedicated day-rate calculator is on my build list.
Tax status matters (UK: IR35)
In the UK, IR35 rules decide whether a contractor working through a limited company is taxed like an employee. If a contract is inside IR35, take-home pay drops significantly. Since April 2021, medium and large private-sector clients decide status for most engagements.
Many EU countries have their own rules on false self-employment. Check before structuring a long contract.
When contracting makes sense
- You have in-demand skills and a pipeline of clients
- You can handle income gaps
- You want variety or flexibility
- The rate premium genuinely exceeds what you give up