Based on your marginal rate (tax on your top £1 of income). Accurate unless many days off moves you into a lower tax band.
Tax you avoid per holiday day
Corporation Tax (27%)+£133
Dividend Tax (34%)+£124
Total saved per day+£257
vs Permanent Employee
A perm on £81,200/year gets 25 paid days worth £5,075 after tax. Your equivalent: 20.8 unpaid days.
Frequently asked questions
When you take unpaid leave, you lose your contract rate but also avoid all the taxes that would have been deducted. The "true cost" is what you actually lose in take-home pay after accounting for these tax savings.
For inside IR35 (umbrella), your contract rate first has employer NI (15%) and Apprenticeship Levy (0.5%) deducted. Then you pay income tax (20-45%) and employee NI (8% or 2%) on the remaining gross. The combined marginal rate is typically 47-54% for higher earners.
For outside IR35 (Ltd company), earnings are taxed first at corporation tax (19-25%), then dividends at 8.75-39.35%. The combined marginal rate is typically 26% for basic rate or 51% for higher rate dividend taxpayers.
A permanent employee gets 25-28 paid days off per year. Since contractors have higher day rates but no paid leave, we calculate how many unpaid days (at contractor retention rate) equals the value of a perm's paid holiday.