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What hourly rate should you charge as a contractor or freelancer?

October 11, 2011

Alongside freedom, the potential financial benefit associated with contracting or freelancing is a prime motivator for many people thinking of working for clients as an independent worker.

One of the first things people ask is: “what hourly / daily rate should I charge as a contractor?”

There are two things to look at when answering this question. Firstly, what is the market value for your skills, and secondly, if you have some control over setting your hourly/daily rate, have you realistically worked out what you will earn after taking off time for holidays, and sickness?

What is your market rate?

In our previous guide, we outlined the key factors which determine how much you can earn as an IT contractor.

Essentially, especially in the world of IT contracting, you need to look at the following factors when working out the market rate for your skills:

1) Your skills – often your specific technical skillset if you are an IT professional.

2) Your experience – the depth of your experience, and how much time you have spent within a sector / industry.

3) The location of the contract/freelance role – rates are highest in London and the South East, followed by other major cities.

4) The state of the market in general – the market has deteriorated markedly in 2009, although further declines are less likely.

5) Your negotiation skills – if you are confident at negotiating, your chances of securing a higher rate are stronger.
What rate do you need to earn?

Given that your maximum rate may well be determined by the market forces discussed in the previous section, you also need to work out what your income will be for a given daily or hourly rate.

Although you could theoretically calculate your gross turnover as a contractor by multiplying your hourly rate by 37.5 (to make up a whole week), and then by 52 to work out your annual income, this isn’t realistic.

In reality, you need to deduct time for bank holidays (10 working days per year), time off for sickness (2 weeks perhaps), and then further time off for your own holidays (4 weeks).

You’re left with 44 weeks when you actually work for clients – and that’s only when you have secured work.

In addition, the amount you will take home after tax can vary wildly, depending on if you work via an umbrella or limited company, and if your work is subject to the IR35 rules or not.