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Contract rates - how much do IT contractors earn?

Published on Jun 2, 2009 |

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Along with the greater freedom contracting offers, the ability to earn more money is often the main motivation for IT workers thinking of becoming contractors.

In this article, we look at the main factors which will affect the rates you can command as an IT contractor.

Skills & Experience

Your skill-set will have the largest impact on the contract rates you can command. Contractors with cutting edge knowledge can earn in excess of £100 per hour, while the average contract rate falls into the £30 to £40 bracket (depending on the overall demand for IT contractors).

Many contract jobs are to fill a specific role - for example, a client may be seeking a 'senior data analyst' for example, who is expected to possess a variety of business skills as well as technical ability.

Industry experience is another important factor for clients - a lot of contractor work (e.g. banking / financial services) will require in-depth knowledge of industry practices, terminology and processes.

To put it simply, the more in-demand the skill / role, the higher the contract rate.

2. Location

Average contract rates vary significantly across the country. Unsurprisingly the highest average rates can be found in the City, followed by Greater London and the South East, reflecting general income trends across the UK.

3. Economy

The state of the general economy has had a significant effect on the IT contracting industry since the end of 2008. Contract work is harder to find, and most core market rates have fallen over the past year. The number of advertised contract roles fell by over 60% in the year to April 2009.

However, unlike in previous downturns, many clients have imposed rate cuts rather than simply ditching contractors. With many IT departments being told to cut headcounts, contractors are actually a very useful way of getting the job done without hiring permanent staff.

Like the stock market and advertising industry, contractors are traditionally the first to suffer when a downturn comes, but the first to benefit from an upturn. So, the appearance of any genuine 'green shoots' should be a strong signal of better times for the contracting industry.

4. Commission

Most contractors find new work via recruitment agents. The end client will pay a rate to the agency, from which they will deduct their commission. Always make sure you know what your agent's cut is before signing a contract. If the rate is too high, you should aim to negotiate a lower commission rate - and pocket the difference yourself.

Clearly, if your skills are in high demand and the market is buoyant, you will have more negotiating power. If the opposite is true, you might have to accept what you're offered or risk losing the contract.

Recent reports suggests that clients are putting pressure on both agents and their contractors, as the squeeze continues to be felt across the industry.

5. Company Structure

There is a significant gap in take home pay between a contractor working via their own limited company, compared to an umbrella company contractor. Which structure you decide upon will often be affected by your IR35 status, so many contractors elect to use umbrella companies if they are caught by the IR35 rules.

The most tax efficient way of working as a contractor is via a limited company, extracting most of your income in the form of dividends and a low salary. Read more in our guide to contractor dividends vs salary.