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.
Here we look at the main factors which will affect the rates you can command as an IT contractor.
You can also get a good impression of the average rates being paid according to skills and location via our upgraded Contract Rate Checker.
1. Skills & Experience
Your skillset will have the largest impact on the contract rates you can command. Contractors with cutting edge knowledge can earn in excess of £1000 per day, while the average median IT contract rate is around the £425 mark (March 2017) – a rise of 6.25% on the same period in 2016, according to our rate checker.
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.
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.
Unsurprisingly, the state of the economy has a significant bearing on the IT contracting industry as a whole. During the 2007/8 recession, the number of contract assignments on offer plummeted (this was particularly noticeable in the public sector). The number of advertised roles plummeted by 60% in the 12 months to April 2009.
Many contractors (particularly in the banking sector) were forced to take on pay cuts of 10% or more.
Rates rose for several years before flat-lining from 2012-15. Since then, median rates have been rising again, although average rates in 2017 remain below or about the same as 2005 levels. In real terms, average take-home pay is a fair bit lower than it was in the early 2000s.
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.
5. Company Structure
There is a significant gap in take-home pay between a contractor working via their own ltd 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.