Alongside freedom, the potential financial benefit associated with contracting 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 for your skills?
IT contractors are hired when companies are looking to fill a short term gap in their IT expertise, or as part of a general strategy to outsource technical work. This article looks at what factors influence how much contractors can earn.
As the term implies, contractors are contracted to work for companies for a fixed period of time. As a general rule, they significantly more than permanent employees performing similar roles, although the tax advantage has decreased in recent years – particularly following the April 2016 dividend tax hike.
Many IT people value the freedom and choice that contracting offers, as well as the financial benefits. There are some disadvantages such as putting up with the uncertainty of finding new IT contract roles, and weathering economic downturns, but overall you will rarely find an IT contractor who regrets leaving permanent employment.
IT contract rates vary a great deal, according to a number of factors:
The most influential factor in working out what contract rate you may expect. Some niche skills can attract rates in excess of £100 per hour, whereas less in-demand skills (such as general web design skills) will attract much lower rates. You can find out how much your skills are worth via the excellent ITJobsWatch.
The length of time you have practiced your skills is obviously an important factor. Despite many IT contractor stereotypes, business experience is also very important. Some roles may be purely technical, but general business experience cannot be overlooked.
The City and London in general always attract the highest contract rates, followed by the South-East. In fact, over two-thirds of all current IT contract roles are based in these regions.
The state of the general economy usually has a massive effect on the demand for contractors. Although temporary workers are often the first to be cut when times get bad, they’re often the first to be hired following economic downturns.
Clearly, the COVID-19 outbreak has had an enormous effect on the contracting industry, as it has on many other industries.
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.
You can usually get a general idea of the average rates in your sector by talking with recruitment agencies. There are also a number of useful online resources to help you establish what contract rate you can command.