Salary vs hourly pay: what the difference actually means
Salary and hourly pay look interchangeable on paper. In practice they behave very differently, and the gap between them grows the moment unpaid overtime, irregular hours or commuting are involved. Understanding the conversion — and where it breaks down — is the first step to comparing job offers fairly.
The basic conversion is straightforward: a £40,000 annual salary on a 37.5-hour contracted week works out to approximately £20.51 gross per hour. But that figure assumes exactly 37.5 hours worked every week, no unpaid overtime, no commuting time and no work-related costs. For most salaried workers, at least one of those assumptions does not hold in practice.
The key differences between salary and hourly pay
| Feature | Salary | Hourly pay |
|---|---|---|
| Pay for extra hours worked | Usually not — extra hours reduce effective rate | Yes, unless contracted otherwise |
| Holiday pay | Included in annual salary figure | Accrued at 12.07% of hours (statutory minimum) |
| Sick pay | Often occupational sick pay above SSP | Usually statutory sick pay (SSP) only |
| Pension contributions | Calculated on salary; employer contributions more stable | Based on qualifying earnings; varies with hours |
| Income predictability | Fixed monthly regardless of hours | Varies with hours worked |
| Overtime exposure | High — extra hours often unpaid | Low — extra hours usually generate extra pay |
Why unpaid overtime changes the calculation so dramatically
The ONS Labour Force Survey consistently finds that UK employees work substantial unpaid overtime. If a salaried worker averages just five additional unpaid hours per week, the effective hourly rate falls by approximately 12% at any salary level:
| Salary | Contracted 37.5 hrs/wk | Actual 42.5 hrs/wk (5hrs unpaid OT) | Gross hourly (contracted) | Gross hourly (effective) |
|---|---|---|---|---|
| £40,000 | £20.51/hr | 37.5 → 42.5 hrs | £20.51 | £18.13 |
| £60,000 | £30.77/hr | 37.5 → 42.5 hrs | £30.77 | £27.19 |
| £80,000 | £41.03/hr | 37.5 → 42.5 hrs | £41.03 | £36.26 |
Five hours of unpaid overtime per week reduces effective hourly pay by roughly 12% regardless of salary level. Hourly workers, by contrast, are paid for each hour worked and rarely face this erosion — which is why the comparison must use actual hours, not contracted hours.
Holiday pay: the often-missed difference
Salaried employees receive full pay during holiday entitlement — the 28 days of statutory leave (or more for many employers) is already accounted for in the annual figure. Hourly and casual workers accrue statutory holiday pay at a minimum of 12.07% of earnings. When comparing a salary with an hourly rate, check whether the hourly figure includes accrued holiday pay or whether it is paid on top. For a worker earning £20/hour on a full-time equivalent basis, the 12.07% holiday element is worth roughly £2.41/hour — a material difference if it is missing from the quoted rate.
What contractors and day-rate workers need to factor in
Workers comparing a day rate against a salaried role face a more complex calculation. A £500 per day contract rate sounds straightforwardly better than a £90,000 salary, but contractors typically receive no employer pension contribution (worth roughly 3–5% of salary for employees), no paid holiday (28 days statutory represents approximately 11% of the working year), no occupational sick pay, and face the cost and administrative burden of self-assessment. On a like-for-like basis, a day rate needs to be roughly 20–25% higher in gross equivalent terms than the salaried annual figure to break even after those factors are modelled.
How to compare a salary and hourly offer step by step
| Step | Salaried role | Hourly or day-rate role |
|---|---|---|
| 1. Establish annual gross | Use stated salary | Rate × weekly hours × weeks worked |
| 2. Add holiday pay value | Included | Add 12.07% if not already in rate |
| 3. Adjust for overtime | Add unpaid hours to total work time | Usually paid; confirm with employer |
| 4. Subtract commuting costs | Annual travel + work costs | Same |
| 5. Compare after tax | Use take-home calculator | Same (noting NI class differences for contractors) |
FAQs: salary vs hourly pay
How do I convert an annual salary to an hourly rate?
Divide the annual salary by 52 weeks, then by your contracted weekly hours. A £40,000 salary on a 37.5-hour contracted week works out to £40,000 ÷ 52 ÷ 37.5 = £20.51 gross per hour. That is the contracted rate. The effective hourly rate falls if you work unpaid overtime or carry significant commuting costs — use the True Wage calculator to model those factors.
What is the difference between salary and hourly pay for holiday and sick pay?
Salaried employees receive full pay during statutory and contractual holiday entitlement — it is built into the annual figure. Hourly workers accrue statutory holiday pay at 12.07% of earnings, and usually receive statutory sick pay (SSP) only when sick rather than occupational sick pay. These differences can represent several thousand pounds of annual value that do not appear anywhere in the headline hourly rate, and matter significantly when comparing salaried and hourly offers on a like-for-like basis.
How much does unpaid overtime reduce my effective hourly rate?
Five hours of unpaid overtime per week reduces the effective hourly rate by approximately 12% at any salary level. On a £60,000 salary, working 42.5 actual hours instead of 37.5 contracted hours drops the gross effective hourly rate from £30.77 to £27.19. At £40,000 it falls from £20.51 to £18.13. Unpaid overtime is one of the most significant ways a salaried role’s real value diverges from its stated pay.
How much more does a contractor day rate need to be to match a salary?
Roughly 20–25% more gross, once employer pension contributions (typically 3–5% of salary), paid holiday (around 11% of the working year for 28 days statutory leave), sick pay and the administrative cost of self-assessment are factored in. A £90,000 salaried role typically requires an equivalent annual day-rate billing of around £110,000–£115,000 to produce a comparable net position.
Is a higher hourly rate always better than a salary?
Not automatically. Holiday pay, sick pay, employer pension contributions, income predictability and employment rights all have financial value not captured in the headline rate. A salaried role with solid benefits can be worth more than a nominally higher hourly or day rate once those factors are properly modelled. The comparison table above sets out the main structural differences to check before treating the rates as directly comparable.
| Primary source | How PayPrecise uses it | Link |
|---|---|---|
| Income Tax rates and allowances (2026 to 2027) | Used for Personal Allowance and main UK tax bands in calculator/editorial explanations. | View source |
| National Insurance rates and category letters | Used for NI examples and take-home calculations. | View source |
| ONS Annual Survey of Hours and Earnings 2025 | Primary benchmark source for UK earnings, pay percentiles and regional comparisons cited across salary pages. | View source |
Calculator outputs remain illustrative because tax codes, salary sacrifice, pension settings, benefits, commuting patterns and local costs vary by person.