Recruiters quote day rates because they are easy to compare. They are also the single most misleading number in contracting. A GBP 500 day rate does not mean GBP 500 a day in your bank account, and it does not mean GBP 130,000 a year either. Between the headline rate and your actual spending money sit unbilled days, business costs, corporation tax, National Insurance and dividend tax.
This guide walks the whole chain for the 2026/27 UK tax year (6 April 2026 to 5 April 2027), using the rates that apply now. It shows you how to turn a day rate into realistic annual revenue, what survives inside and outside IR35, and the day rate you actually need to match a permanent salary.
A day rate is a price, not an income
When a client agrees GBP 500 a day, they are buying a unit of your time with no employment attached. There is no holiday pay, no sick pay, no employer pension contribution, no notice period and no redundancy. Everything an employer would normally fund out of its own budget has been folded into that one number and handed to you to manage.
That is why comparing a day rate to a salary by multiplying by 260 is nonsense. Nobody bills 260 days. The correct method has three steps: work out how many days you will genuinely invoice, subtract the costs of running the business, then apply the right tax treatment for your IR35 status. Skip any of the three and you will either underprice yourself or plan your finances around money that never arrives.
Step one: how many days will you actually bill?
There are 260 weekdays in a typical year. From that you lose the eight England and Wales bank holidays, whatever holiday you intend to take, and a few days for illness, admin and business development. Then comes bench time: the gap between contracts, which almost every contractor underestimates in year one.
Three planning scenarios are useful. Build your budget on the middle one and treat the optimistic one as upside.
| Scenario | Weekdays | Bank holidays | Holiday taken | Sick and admin | Bench time | Billable days |
|---|---|---|---|---|---|---|
| Optimistic (back to back contracts) | 260 | 8 | 20 | 3 | 0 | 229 |
| Realistic (one short gap) | 260 | 8 | 20 | 3 | 15 | 214 |
| Cautious (one real gap) | 260 | 8 | 20 | 3 | 40 | 189 |
A contractor who assumes 229 days and delivers 189 has overestimated their income by 21 per cent before a single tax calculation. That is the most common budgeting error in contracting, and it is why so many first year contractors are surprised by their January self assessment bill.
From billable days to invoiced revenue
Multiply the rate by the day count and you get the number your company actually invoices. The spread between the optimistic and cautious columns is what you should be holding in reserve.
| Day rate | 189 days | 214 days | 229 days |
|---|---|---|---|
| GBP 400 | GBP 75,600 | GBP 85,600 | GBP 91,600 |
| GBP 500 | GBP 94,500 | GBP 107,000 | GBP 114,500 |
| GBP 600 | GBP 113,400 | GBP 128,400 | GBP 137,400 |
| GBP 750 | GBP 141,750 | GBP 160,500 | GBP 171,750 |
Note how quickly the numbers cross GBP 100,000. Once your personal income passes GBP 100,000 the personal allowance tapers away at GBP 1 for every GBP 2 of income, creating a 60 per cent effective band up to GBP 125,140, per HMRC's income tax rates. Contractors on GBP 600 a day and above need to plan draws around that, not stumble into it.
Outside IR35: how the money moves through your company
Outside IR35, your limited company invoices the client, pays its own costs, pays corporation tax on the profit, and you extract what is left as a mix of salary and dividends. Corporation tax for the financial year starting 1 April 2026 is 19 per cent on profits up to GBP 50,000 and 25 per cent above GBP 250,000, with marginal relief of 3/200 in between, producing a 26.5 per cent marginal rate through the middle band. The rules are set out in HMRC's corporation tax rates guidance.
The standard structure is a director salary of GBP 12,570, matching the personal allowance and the National Insurance primary threshold, then dividends for the rest. That salary now costs the company employer NI, because the secondary threshold sits at GBP 5,000 and the rate is 15 per cent: (GBP 12,570 minus GBP 5,000) times 15 per cent equals GBP 1,135.50. A single director company with no other employees cannot claim the GBP 10,500 Employment Allowance to cover it.
It is still worth paying the full GBP 12,570. Compare the two uses of GBP 8,705.50 of company money: as extra salary plus the NI on it, it delivers GBP 7,570 tax free into your hands. Left as profit it suffers 26.5 per cent corporation tax (GBP 2,306.96), leaving GBP 6,398.54, which after 35.75 per cent higher rate dividend tax nets GBP 4,111.06. The salary route wins by GBP 3,458.94.
Worked example: GBP 500 a day, outside IR35, 214 billable days
Revenue is GBP 107,000. Assume GBP 3,500 of genuine business costs: accountancy GBP 1,400, insurances GBP 450, software and subscriptions GBP 600, use of home GBP 300, hardware and training GBP 750.
Company profit before tax is GBP 107,000 minus GBP 3,500 costs, minus GBP 12,570 salary, minus GBP 1,135.50 employer NI, which is GBP 89,794.50.
Corporation tax: 25 per cent of GBP 89,794.50 is GBP 22,448.63. Marginal relief is 3/200 times (GBP 250,000 minus GBP 89,794.50), which is 0.015 times GBP 160,205.50, or GBP 2,403.08. Tax due is GBP 20,045.55, an effective rate of 22.3 per cent. That leaves GBP 69,748.95 of distributable profit.
Dividend tax for 2026/27 uses the new rates: 10.75 per cent ordinary, 35.75 per cent upper and 39.35 per cent additional, confirmed in HMRC's technical note. The salary uses the whole personal allowance, so the GBP 37,700 basic rate band is available for dividends. The first GBP 500 is covered by the dividend allowance, the next GBP 37,200 is taxed at 10.75 per cent (GBP 3,999.00), and the remaining GBP 32,048.95 at 35.75 per cent (GBP 11,457.50). Total dividend tax is GBP 15,456.50.
Take-home is GBP 12,570 salary plus GBP 69,748.95 dividends minus GBP 15,456.50 tax, which is GBP 66,862.45. Total tax and NI taken is GBP 36,637.55. Against GBP 107,000 invoiced, that is GBP 312.44 of take-home per billable day. A GBP 500 day rate is really a GBP 312 day rate.
Inside IR35 or through an umbrella: where the money goes
Inside IR35, or on an umbrella contract, the assignment rate has to absorb the employment costs before anyone works out your gross pay. Take the same GBP 107,000 of assignment income. Deduct an umbrella margin of GBP 1,200, leaving GBP 105,800 to cover gross salary plus employer NI at 15 per cent above GBP 5,000 plus the 0.5 per cent apprenticeship levy that most umbrellas pass on.
Solving for gross salary: S plus 0.15(S minus 5,000) plus 0.005S equals GBP 105,800, so 1.155S equals GBP 106,550 and S equals GBP 92,251.08. Employer NI is GBP 13,087.66 and the levy is GBP 461.26.
On that gross salary, income tax is 20 per cent on the GBP 37,700 basic band (GBP 7,540) plus 40 per cent on the remaining GBP 41,981.08 (GBP 16,792.43), totalling GBP 24,332.43. Employee NI is 8 per cent on GBP 37,700 (GBP 3,016) plus 2 per cent on GBP 41,981.08 (GBP 839.62), totalling GBP 3,855.62. Net pay is GBP 64,063.03.
From 6 April 2026 the recruitment agency in the chain, or the end client where there is no agency, is legally responsible for operating PAYE on umbrella workers under the new labour supply chain rules. That has pushed several non compliant umbrellas out of the market, which is good news, but it has not changed the arithmetic above.
Why the outside IR35 premium is smaller than it used to be
At GBP 500 a day, outside IR35 produced GBP 66,862 and umbrella produced GBP 64,063. That is a gap of GBP 2,799, or 4.4 per cent. Contractors who remember the days when outside IR35 was worth 25 per cent more should look at that number carefully.
At the margin the gap has actually reversed. An extra GBP 1 of company profit above the higher rate threshold suffers 26.5 per cent corporation tax and then 35.75 per cent dividend tax, leaving 47.2p. An extra GBP 1 of assignment income on an umbrella supports 86.6p of gross salary after employer NI and levy, of which you keep 58 per cent, or 50.2p. The outside IR35 advantage now comes almost entirely from the tax free salary band, the 10.75 per cent basic rate dividend band, deductible business expenses and pension flexibility, not from the top slice.
Run your own figures through our contractor take home calculator and compare statuses side by side with the IR35 calculator.
The day rate that actually matches a permanent salary
To compare properly you have to match take-home plus pension, not gross figures. Take a GBP 70,000 salaried job with a 5 per cent employer pension contribution. Income tax is GBP 15,432 and employee NI is GBP 3,410.60, so net pay is GBP 51,157.40, plus GBP 3,500 into the pension.
To replicate that outside IR35 you need net dividends of GBP 38,587.40 on top of the GBP 12,570 salary. Working backwards through the dividend bands, that requires GBP 45,305.29 of dividends, which requires GBP 56,537.13 of pre-tax profit after marginal relief. Add GBP 3,500 of business costs, GBP 3,500 of employer pension contribution, GBP 12,570 of salary and GBP 1,135.50 of employer NI, and the company needs GBP 77,242.63 of revenue.
| Permanent salary (plus 5% employer pension) | Net pay to match | Company revenue needed | Rate at 189 days | Rate at 214 days | Rate at 229 days |
|---|---|---|---|---|---|
| GBP 45,000 | GBP 35,919.60 | GBP 51,680.62 | GBP 273 | GBP 242 | GBP 226 |
| GBP 70,000 | GBP 51,157.40 | GBP 77,242.63 | GBP 409 | GBP 361 | GBP 337 |
| GBP 90,000 | GBP 62,757.40 | GBP 102,808.28 | GBP 544 | GBP 480 | GBP 449 |
These are break even rates, not target rates. They contain no premium for the risk you are carrying, no allowance for training between contracts, and no reward for the fact that you can be terminated on a week's notice. Add 20 to 30 per cent on top before you call a rate acceptable. Our day rate calculator does this conversion in both directions.
The costs employees never see
Professional indemnity, public liability and employers liability cover typically runs GBP 300 to GBP 700 a year for a solo consultant. Accountancy for a contractor limited company is usually GBP 1,200 to GBP 1,800. Then there is the cost of your own training, your own hardware, your own phone contract and your own pension, all of which an employer would otherwise fund.
The pension point is the one contractors most often waste. Employer pension contributions from your own company are an allowable business expense, so they escape corporation tax, employer NI, employee NI and dividend tax entirely. Putting GBP 20,000 a year into a pension through the company costs GBP 20,000 of profit that would otherwise have delivered roughly GBP 9,400 of spendable higher rate dividend income. If you are billing above GBP 100,000 and drawing everything out, you are almost certainly paying more tax than you need to.
Five pricing mistakes to avoid
First, quoting a rate based on 250 billable days. Second, forgetting that an inside IR35 assignment rate has to fund employer NI and the levy, so a GBP 500 inside rate is not comparable to a GBP 500 outside rate. Third, accepting a rate uplift that looks generous in percentage terms but does not cover the extra tax: moving from outside to inside IR35 at GBP 500 a day needs roughly a 4 to 5 per cent uplift just to stand still on these figures. Fourth, ignoring the GBP 100,000 personal allowance taper when planning dividends in a strong year. Fifth, treating VAT you have collected as your own money, which is the fastest route to a cash flow crisis at the end of a quarter.
Price from the bottom up: decide the take-home you need, add the tax, add the costs, divide by a realistic billable day count. That number is your floor.