Employee vs Contractor: Your Financial Safety Net Compared

The full comparison

This table shows the general position for each way of working. Where the answer depends on your contract or on eligibility rules, it says so.

| | Permanent employee | Umbrella employee | Agency worker | Limited company director | Sole trader | |---|---|---|---|---|---| | Company sick pay | Often, depending on the employer | Depends on the employment contract | Depends on the agency contract | Only what your company pays you | None | | Statutory Sick Pay | Yes, if eligible | Usually, if eligible | May qualify, if eligible | Possible on a PAYE salary, paid by your company | Not on self-employed earnings | | Group income protection | Depends on the employer | Depends on the umbrella company | Depends on the agency | Only if your company arranges cover | None | | Death-in-service cover | Depends on the employer | Depends on the umbrella company | Depends on the agency | Only if your company arranges cover | None | | Paid holiday | 5.6 weeks a year minimum | Yes, sometimes included in the rate | Yes, sometimes included in the rate | Set by you; clients don't pay for days off | None | | Employer pension contributions | Automatic enrolment, if eligible | Usually auto-enrolled, if eligible | Automatic enrolment, if eligible | No auto-enrolment duty in a one-person company; your company can still contribute | None; personal pension only | | Maternity or paternity pay | Statutory pay if eligible, sometimes enhanced | Statutory pay if eligible | Statutory pay if eligible | Statutory pay possible on a PAYE salary, paid by your company | Maternity Allowance instead, if eligible | | Pay between contracts | Salary continues | Usually none between assignments | None between assignments | No client income; company reserves only | No income |

What each row means

Sick pay

Company sick pay is a contractual benefit, so it depends entirely on who employs you and on what terms. Statutory Sick Pay is the legal minimum for eligible employees: for absences starting on or after 6 April 2026, it is payable from the first full day off sick, at £123.25 a week or 80% of average weekly earnings if lower, for up to 28 weeks.

For limited company directors, SSP depends on their pay arrangements, as there are specific rules for directors. Where it is payable, the director's own company pays it from its own funds and can't reclaim it from HMRC. The contractor guide covers sick pay for each way of working in more detail.

Group income protection and death in service

These are workplace benefits that some employers provide. They usually end when you leave the employer. Whether an umbrella company or agency provides them depends on its terms, so it is worth asking. A limited company can arrange company-paid cover for its director, such as executive income protection, but nothing is in place unless the company sets it up.

Paid holiday

Most employees and workers are entitled to 5.6 weeks of paid holiday a year. Umbrella employees and agency workers keep this entitlement, although for some irregular-hours workers holiday pay can be included in the hourly rate ("rolled-up" holiday pay). Limited company directors and sole traders are paid by clients for work done, so time off usually means no client income for those days.

Workplace pensions

Employers must automatically enrol eligible staff into a workplace pension and contribute to it. Umbrella companies are usually the employer for this purpose, so their employees are typically auto-enrolled.

A limited company with a single director and no other staff usually has no automatic enrolment duties. The director can still choose to have the company make pension contributions, but nothing happens automatically.

Parental pay

Statutory Maternity Pay and Statutory Paternity Pay are available to eligible employees, including umbrella employees and agency workers who meet the rules. A director on a PAYE salary may qualify through their own company, which pays it and can usually reclaim most of it from HMRC. Self-employed people can't get Statutory Maternity Pay, but may be able to claim Maternity Allowance instead.

Pay between contracts

A permanent employee is paid between projects. A contractor's client income stops between contracts. Umbrella employees are usually not paid between assignments, and limited company directors rely on money held in the company.

The gaps contractors most often overlook

• Your own company pays your sick pay and parental pay. Statutory payments through a limited company are not new money: they come out of the company's own funds.
• Pension contributions stop being automatic. Moving from a permanent job with employer contributions to a one-person company can mean years with no workplace pension contributions, unless you choose to make them.
• Workplace cover ends on your last day. Group income protection and death-in-service cover usually stop when you leave the employer, whatever your health at the time.
• Holiday and sickness both cost you days of income. Every day not worked is a day not paid, which is why many contractors think about a financial buffer.

Ways people fill the gaps

This is general information about the options, not a recommendation.

• A savings buffer, personal or held in the company, to cover time off, gaps between contracts and the early weeks of an illness.
• Personal or company-paid income protection, which can pay a monthly income if illness or injury stops you working. See income protection explained.
• Personal life insurance or company-arranged life cover, to replace death-in-service cover. See life insurance explained.
• Personal or company pension contributions, to replace employer contributions.

A hypothetical example

Maya is a permanent QA lead. Her employer pays three months' full sick pay, contributes to her pension, provides death-in-service cover at four times salary, and gives her 25 days' paid holiday.

She leaves to contract through her own limited company, as its only director.

• Sick pay: her company could pay her SSP on her salary, out of the company's own money. There is no company sick pay unless she arranges it.
• Pension: employer contributions stop. Her company has no automatic enrolment duty, so any contributions are her decision.
• Death-in-service cover: it ends on her last day as an employee.
• Holiday: she can take as much time off as she likes, but clients don't pay for it.

Nothing about Maya's health or family changed. Only her way of working did, which is why a move into contracting is a common moment to review this.

Questions worth considering

• Which of my current workplace benefits would I lose if I went contracting?
• How would I work: umbrella, agency, my own limited company or sole trader?
• How many weeks of essential costs could I cover from savings or company reserves?
• Would I want to replace death-in-service cover and employer pension contributions?
• How would I cover holiday and gaps between contracts?