One of the most frequently asked questions by people thinking of becoming IT contractors is “what hourly/daily rate can I achieve?”
Contract rate factors
As you’d expect, the answer to this question depends on a number of factors, such as:
- Your technical skills and industry expertise. Cutting-edge skills are worth more, and specific industry knowledge can command a premium.
- The location of the contract. Rates are highest in the South-East/London/The City.
- Market demand for your expertise – high-demand niche skills can lead to significantly higher rates.
- The state of the economy – contractors are often the first out during a recession, and the first to be hired during a recovery.
- Commission – how much does your agent take from your gross rate?
- Company structure – you will typically earn more as a limited company contractor than umbrella working.
- IR35 / Off-Payroll rules – if your contract work is caught, the financial cost will be significant.
How many hours/days will you actually work?
There are many things you should include when attempting to calculate your annual pre-tax income:
- Public holidays – Permanent staff don’t lose money, but contractors do, so deduct an average of 2 weeks, and possibly more if your client shuts up shop for an extended period over the Christmas period.
- Sickness – There’s not a lot you can do about taking time off due to poor health. You may want to allow another 2 weeks or more for this eventuality.
- Holidays – Although contractors tend to take fewer breaks than ‘permies,’ you’ll expect to take a few weeks off for holidays during contracts – for this example, allow 4 weeks.
- Downtime between contracts – Even with regular work, you may experience gaps between contracts. For a realistic estimate, it’s worth allowing 1-2 weeks for each transition.
Even without an allowance for any enforced time off between contracts, we are already down from 52 to 44 weeks per annum.
Real-Life example
For an IT contractor on an hourly rate of £40, contracted to a 37.5-hour week (5 days) contract, working 44 weeks in total, this equates to £66,000 gross per year or £5,500 turnover per month.
- At £50 per hour, this gives an annual gross income of £82,500 and a monthly turnover of £6,875.
- At £30 per hour, this gives an annual gross income of £49,500 and a monthly turnover of £4,125.
It’s essential to remember that your net take-home pay can vary significantly. These figures show your pre-tax earnings.
As you’d expect, your take-home net pay can vary wildly, depending on
- If you work via a limited or umbrella company
- If you’re limited, is your work caught by IR35?
Permanent to Contractor Calculator
Dave Chaplin from Contractor Calculator, told us:
As a starting point, you should expect to end up with at least as much in your pocket each month as you currently do as a permanent employee.
Then on top of that, you should expect a bit more because contractors can charge a premium, and also because of the tax advantages of being a contractor – assuming you avoid IR35.
You can use Chaplin’s Permanent to Contracting Calculator to get a baseline starting rate.
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