De-mystifying contractor day rates

I have always had self-employed work on the side, and in the early 2000s after the dotcom boom there was money to be made helping small to medium businesses get online. The value of that work was high: it took them from a single-premise retailer to regional, national, or even global.

It’s funny, but back then I was young, with a bit of technical knowledge, and able to command £500 a day as a side hustle with no questions. Yet today I increasingly find myself in debates about day rates, and the person on the other side of the conversation has little insight into what they really mean, let alone value.

“You charge £750 a day?” The number lands like a salary, and wild assumptions are made.

It shouldn’t. A day rate is not a salary, and multiplying it by the number of weekdays in a year is the wrong sum. In this post I’ll outline how day rates are arrived at in the self-employed world, and why what might be perceived as a high rate isn’t actually that high. Then we’ll do the sums.

What a £100k job really includes

Let’s start with something familiar: a salaried job.

I’ll use £100,000 as a baseline because it’s a nice round number, and an indicator of the minimum I expect to earn in full-time employment. That headline salary is not what the job costs, and it is not all the employee receives.

Illustrative figures based on current UK rates; NI thresholds and rates can change.

There may be bonuses too. Paid holidays are standard, and employees may also receive contractual sick pay or at least statutory sick pay. The employee also receives their salary while taking annual leave and, depending on their employment terms, while absent through sickness. Generally you get paid month to month, regardless of ups and downs in the business. The business absorbs those.

That is the package a day rate has to replace. The client is not buying eight hours of typing. They are buying the work and all the things an employer used to cover: kit, software, pension, time off, and the quiet months when there is no invoice to send.

The £195,000 mistake

What I often find is that people multiply the day rate by the number of weekdays in a year, and stop there.

There are roughly 260 weekdays in a typical year. Oh, you charge £750 a day? Wow, that’s £750 × 260 = £195,000.

That only works if every weekday is sold, worked, and paid. It isn’t.

The useful number is billable days: the days a client actually pays for. Holidays, sick days, gaps, admin, and finding the next job do not appear on an invoice. They still have to be lived on.

You don’t get paid for every day

At a minimum, holidays and sick days come out of the year. In reality a contractor also loses days to:

• gaps between contracts
• interviews and proposals
• contract negotiation and procurement
• training
• administration
• part-time contracts that leave unusable fragments of the week
• clients changing requirements
• simply not having enough work
• life events (planned and unplanned)

If a business wants you full time for a stretch, that is great. Often it is a few days a month, or a couple of days a week.

Say one client wants 2 days a week for 6 months, and another wants the same. Now you are billing 4 days out of 5, and filling that leftover day with incidental work is tricky. Some companies will want 2 days, some 3. Agree a minimum with both, and in a busy period they both want 3, and you have a time problem. So overselling is risky too. It is a delicate balance.

Finding and retaining work

Finding the next job is unpaid work as well. The work I do is project and product based, and I usually have to fit in with when the client wants me, not when I happen to be free. This leads to gaps.

Contractors are also the first to be cut when times are tough. Being dropped with little warning, then having to pick up more work, can leave weeks if not months of downtime. Multiple clients help, but time is still lost, and that has to be factored into the rate.

Often, as part of getting to know a business, I’ll do a bit of unpaid discovery. It can be mutually useful: you find out about each other, and whether you’d actually work well together. I try to limit this to a day or two, but it is still time invested that nobody invoices for. Anything beyond that, or work above and beyond what was paid for, needs to be negotiated, usually as a bonus, a revenue share, or similar. It is not a free extra that somehow doesn’t count.

Revenue isn’t the same as cash in the bank either. A contractor can have signed work and outstanding invoices while still having to fund the business and personal costs every month. Thirty or sixty day payment terms, a project that pauses, or a client who pays late all still have to be lived through.

Predictable work can cost less

When a client can book a block of time, perhaps 2 days a week for 6 months with a couple of months’ notice, I can potentially discount the rate. That is not saying the work is worth less, or offering a gift. It is pricing for predictability and lower risk.

High-risk work needs a higher rate than work you can see coming. If I know what I will get for a given period, with a notice period, I can plan, fill gaps, and manage income and business development. A short, stoppable, last-minute engagement does not give me that, so it costs more.

Shares are not a day rate

Shares and options can be a nice addition, especially getting in on the ground floor with a start-up. But it is all “jam tomorrow”.

They could be worth millions in the future, or nothing, depending on there being a market to sell them in, and that is irrelevant when there are bills to pay today.

Shares can also be diluted, so the slice you were offered shrinks over time. They often come with terms attached, and may not vest for 2 or 3 years.

Personally I don’t like options. If shares are a financial reward for work already done, they should come fully diluted and vested, without further terms.

If you want to buy loyalty for years to come, that costs more. If share options for work done are withheld for 3 years, that’s not a bonus, it’s a ransom. You can’t withhold payment for work done.

So unless I’m tied in with a very robust agreement, anything that lands after 12 months may as well be worth nothing on a contractor basis, and the bottom line is that a day rate is still essential to make ends meet.

Tax, IR35, and the admin nobody invoices for

Tax administration is also becoming more involved, with Making Tax Digital for Income Tax being phased in and accounting and software costs becoming another overhead.

Then there is IR35, the UK off-payroll working rules. In plain English: if an engagement is deemed inside IR35, the tax treatment can be much closer to employment, even though the contractor does not automatically acquire all the rights and benefits of an employee. Working “outside IR35” as a genuine business-to-business arrangement is a different shape, and still not a salary. Either way, the headline day rate is not take-home pay, (and this is not tax advice).

Mates rates are a curse

People think that because you are friends, or know someone, they are entitled to a “special deal”. A discount for a six-month booking with notice is pricing for lower risk. A mates rate is usually the opposite: informal, unbounded, and still a day I cannot sell to anyone else.

Unless there is a like-for-like, in-kind return that I would otherwise have paid for, this is money out of my pocket. A pint, a mention, or an introduction that never quite happens does not cover a day at £550, let alone £750.

These people also have a habit of taking liberties with your time, your role, and your responsibilities. The “could you just” is fine when I’m on a healthy day rate. A mates rate is already a losing streak, and anything extra just compounds it. Friendship also makes it harder to draw a line, send an invoice, or chase payment when it drags.

If I want to help someone, it is better to say no and point them in the right direction. Or, if I’m feeling generous and it is a small task, just do the favour and don’t pretend there is any commercial agreement. Then I’m unbound, because it is purely a favour.

What a year actually looks like

To help make the point, here are some worked examples.

These examples use the discounted rate from earlier: £550 a day for the predictable blocks (2 days a week, booked ahead, with notice). The headline £750 only appears when leftover days get filled. Figures are rounded and illustrative, not a forecast or a tax calculation.

I’m deliberately not using a theoretical maximum. Contractors can talk about billing 220 days; that is not the point. I’m trying to model what a genuinely good year looks like when there are holidays, gaps, and the practical limits of selling five days a week.

Very good year. Two clients at 2 days a week for 6 months, then the same pattern again for the next 6, at £550. Four days a week gives 208 theoretical days. After holidays, bank holidays, sickness and unavoidable non-billable time, I’ll assume around 160 actually billed at £550. In a very good year you also fill some of the leftover fifth days: say 20 days at £750.

• 160 × £550 = £88,000
• 20 × £750 = £15,000
• Total = £103,000 invoiced, 180 days billed. Still not £195,000.

Good year. You get that 4-day pattern at £550 for half the year, then lose a month between contracts. After that, one client at 3 days a week for the rest of the year. The leftover days do not really fill. Call it about 140 days at £550: £77,000 invoiced. That is already below the £100k job, with no employer pension, no paid holiday, and no one covering the empty month.

Thin year. Three clients across the year, but with big gaps. Work arrives in lumps, then disappears while you find the next one. About 100 days at £550: £55,000 invoiced. That is roughly half the £100k job, with more risk and none of the safety net.

The £103,000 isn’t comparable with a £100,000 salary. The £100,000 employee receives their salary plus employer pension, employer NI, paid leave and other benefits. The contractor’s £103,000 is turnover from which the contractor still has to pay their business costs and provide their own pension.

So when you hear a day rate, you are not hearing a salary divided by 260. You are hearing a price that has to cover the work, the gaps, the kit, the tax admin, and the fact that nobody pays you when the diary is empty.

Conclusion

It’s been a while since I looked at my rates, and with having savings and other income, I hadn’t thought oo deeply about it, but this process along with inflation over recent years has really opened my eyes.

Frankly I need to review my rates. Even £550 is low, and on balance, unless I make up this difference elsewhere, it should be closer to £700 and my occasional rate higher still.

Whether that difference is made up through higher rates, other income, more secure commitments, or simply a better work-life balance, contracting has to be worth the additional overheads and risk.

Further reading

• Understanding off-payroll working (IR35)
• Using Making Tax Digital for Income Tax
• Rates and thresholds for employers