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 skills and experience. Cutting edge skills are worth more. Industry experience is invaluable.
The location of the contract. Rates are highest in the South-East/London/The City
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, compared to 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:
1) Public Holidays – permanent staff don’t lose money, but contractors do, so deduct 2 weeks, and possibly more if your client shuts up shop for an extended period over the Christmas period.
2) 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 for this eventuality.
3) 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.
Even without an allowance for any enforced time off between contracts, we are already down from 52 to 44 weeks per annum.
Real Life Examples
For an IT contractor on £40 per hour, 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 gross per month.
At £50 per hour, this gives an annual gross income of £82,500 / monthly income of £6,875.
At £30 per hour, this gives an annual gross income of £49,500 / monthly income of £4,125
As you’d expect, your take-home pay can vary wildly, depending on whether you are working via an umbrella or limited company, and if you’re caught by IR35 or not.
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.”
