Contractor vs Employee UK: Which Is Cheaper to Hire in 2025/26?

You need someone to do a job. The question every hiring manager eventually asks: should we bring in a contractor or hire a permanent employee? The answer isn't as simple as comparing a day rate to a salary — there are hidden costs on both sides, and the April 2025 employer NI increase has changed the maths again.

Here's a proper breakdown of what each option actually costs your business in 2025/26, and when each makes financial sense.

The True Cost of an Employee

A salary figure is just the starting point. On top of that, you pay employer National Insurance at 15% (up from 13.8% before April 2025), workplace pension contributions, holiday pay, and various overhead costs. For a £45,000 employee, the real picture looks like this:

That's roughly 37% above the headline salary. From year two onwards, without recruitment and equipment costs, the ongoing overhead settles around 27–30%.

The True Cost of a Contractor

Contractors charge a day rate, and on the surface it looks expensive. A contractor doing similar work might charge £450 per day. Over 220 working days, that's £99,000 — more than double the salary. But there's no NI, no pension, no holiday pay, no sick pay, and no recruitment risk.

*If the contractor is inside IR35, you'll also pay employer NI on their deemed employment payment — adding around £14,100 to the total. This is a critical distinction that many businesses overlook.

The Break-Even Day Rate

So at what day rate does a contractor become cheaper than an employee? For our £45,000 employee example (total cost ~£61,667 in year one), the break-even contractor day rate is roughly:

Most experienced contractors charge well above these figures, which is why permanent employees are usually cheaper for ongoing roles. But cost isn't the only factor.

When a Contractor Makes Sense

Short-term projects. If you need someone for 3–6 months, the recruitment cost and ramp-up time for an employee makes a contractor the obvious choice. You pay for exactly what you need, then the engagement ends cleanly.

Specialist skills. Niche expertise that you only need occasionally — a cloud migration architect, a penetration tester, a specific regulatory consultant — is often better sourced as a contractor. Finding and retaining these specialists as employees can be extremely difficult.

Speed. You can typically onboard a contractor within days. Hiring an employee takes 4–12 weeks on average, longer for senior roles. When a project is time-sensitive, the speed premium is worth it.

Flexibility. Contractors can be released at the end of their contract with no redundancy obligations, no notice period complications, and no employment tribunal risk.

When an Employee Makes Sense

Long-term roles. If you need someone for 12+ months in an ongoing capacity, an employee is almost always cheaper. The overhead costs (NI, pension, holidays) are predictable and lower than equivalent contractor day rates.

Team culture and IP. Employees are invested in your organisation. They build institutional knowledge, contribute to culture, and you own their work output by default. Contractors come and go.

Compliance simplicity. No IR35 assessments, no off-payroll working rules to navigate, no risk of HMRC challenging the engagement.

The IR35 Factor

Since the off-payroll working rules shifted responsibility to hiring organisations (April 2021 for the private sector), IR35 has become a major factor. If a contractor is deemed inside IR35, you pay employer NI on top of their fee, and the contractor pays employee NI and income tax — making the arrangement significantly more expensive for everyone.

Many businesses have responded by issuing blanket "inside IR35" determinations to avoid risk, which has pushed some contractors towards umbrella companies or back into permanent employment.

The Umbrella Company Middle Ground

When a contractor is determined to be inside IR35, many now work through umbrella companies. The umbrella becomes the contractor's employer, handling PAYE, employer NI, and pension auto-enrolment. The contractor receives a net salary after all deductions.

From the hiring company's perspective, an umbrella contractor is simpler than managing off-payroll working rules directly — the umbrella handles all compliance. But from a cost perspective, umbrella arrangements are often the most expensive option. The umbrella takes a weekly margin (typically £20–£30 per week), and the contractor's take-home pay is significantly lower than an outside-IR35 arrangement.

A contractor on £450/day through an umbrella typically takes home around £260–£280/day after employer NI, employee NI, income tax, pension auto-enrolment, and the umbrella margin. Compare this to approximately £350/day take-home outside IR35 via a personal limited company. The £80–£90/day difference is why IR35 status matters so much.

Hidden Costs Most People Forget

The standard contractor-vs-employee comparison often misses several significant costs:

Recruitment costs. Hiring a permanent employee through a recruitment agency typically costs 15–20% of first-year salary. For a £50,000 role, that's £7,500–£10,000. Contractor recruitment is faster and usually commission-free through specialist agencies (the agency takes a margin from the day rate instead). If you include recruitment costs amortised over the expected tenure, the employee becomes relatively cheaper the longer they stay.

Management overhead. Employees require line management, appraisals, training plans, and HR administration. Contractors are typically self-managing. For small businesses without a dedicated HR function, the time saving of contractor engagement can be significant.

Notice periods and termination costs. An employee on a 3-month notice period represents a fixed cost commitment even if the project ends early. Contractors typically work with 1–2 weeks' notice, giving you much more flexibility to scale up and down with demand.

Bench time. Employees are paid whether there's work for them or not. During quiet periods, you're still covering salary, NI, and pension. Contractors only cost you money when you need them.

The April 2025 Employer NI Increase

The increase in employer NI from 13.8% to 15% (with the secondary threshold reduced from £9,100 to £5,000) has widened the cost gap between employees and contractors. For a £50,000 employee, the additional employer NI cost is approximately £1,300 per year compared to the 2024/25 rates.

This makes contractors relatively more attractive from a cost perspective — they absorb their own NI costs within their day rate. However, it also means that inside-IR35 contractors have become more expensive for hiring companies, since the employer NI is charged on top of the day rate.

The increased Employment Allowance (£10,500 for 2025/26) partially offsets this for small employers with NI bills under £100,000 per year. If you're a small business hiring your first few people, this allowance can cover a significant chunk of employer NI costs.

The Bottom Line

For most ongoing roles, employees are 15–40% cheaper than contractors when you account for all costs. But contractors offer flexibility, speed, and zero long-term commitment that can be worth the premium — especially for project-based work, specialist skills, or when you need someone fast.

The right answer depends on duration, skills availability, budget flexibility, and your appetite for IR35 risk. As a general rule: if you need someone for more than 12 months in a clearly defined role, hire permanently. If you need specialist skills for a defined project with a clear end date, use a contractor. If you're unsure, start with a contractor and convert to permanent if the relationship works — most contractors are open to this if the terms are right.

Use our Contractor vs Employee calculator to model the specific numbers for your situation, and our IR35 calculator to see the take-home impact for the contractor. For a deeper dive into day rate calculations from the contractor's perspective, read our freelancer day rate guide.