How IT contractors can set their daily, hourly or weekly pay rates for 2024

Due to the financials and freedoms it offers, many techies see becoming a contractor as the best decision they ever made.

But, before being able to hit the temporary labour market as contractor, there is the all-important factor of your day rate to consider.

Here, exclusively for ContractorUK, Alan Lowdell of leading STEM recruitment partner Matchtech, looks at the various factors to keep in mind when setting your contractor rates for 2024.

What is a day rate?

Put simply, your day rate is what you charge out to the client for your services.

Typically, this will be a fixed amount for each day worked, paid at the end of the month. However, some contractors prefer to be paid weekly. Whichever option you prefer, it is good practice to negotiate the day/week rate at the start of your contract.

There are ‘pros’ and ‘cons’ to charging on a day rate basis. Many clients favour this method as it makes budgeting easier. And it can also allow the contractor to charge slightly more than they were charging by the hour!

On the downside however, it can lead to some clients taking advantage of day rate contractors by asking them to regularly work extra hours, as they feel they are able to do this without having to pay extra.

To protect yourself from this happening, when working on a day-rate basis, many tech contractors we place find it better to specify a maximum number of hours that they are willing to work -- at that rate -- as part of the contract. This can also give the contractor more opportunity to charge for any overtime worked.

What is an hourly rate?

The hourly rate is what the contractor charges to the client for the total number of hours they work. Nowadays, hourly rates tend to be more common than daily rates and are often used on projects with lower budgets.

There are many reasons why an hourly rate is more desirable for contractors and clients.

Ultimately, an hourly rate provides more clarity on the costs of the project, allowing contractors to charge for the exact number of hours they have worked.

Unscheduled overtime is rare, and any additional work that needs to be carried out will require approvals from the client. This can make a client reluctant to agree to ‘overtime,’ or more likely to scrutinise the delivery of the project, to ensure that the extra time was needed. In this case, we advise you are transparent with the work you do, and openly discuss any challenges you are facing.

By weighing up both the positive and negative sides of daily and hourly rates, you can make an informed decision on which to apply. It is worth remembering that the client may prefer one over the other, so be transparent when entering a contract and if you want the work, be prepared to be flexible.

With both day and hourly rates, contractors should set out expectations with the client at the start of the project and make sure that both sides are happy with this before any work is undertaken.

Contractors, do your research and set your rates

So, you have decided if you want to charge daily or hourly, and now there’s just the small issue of setting the amount you will charge!

What you charge will vary depending on the industry you work in as well as the experience and skill-level you have.

You will need to carry out research to discover what the average rates are in your industry. A good place to start is to look at permanent roles and the salaries that are attached to them. From there, you can look at how much you should be charging on a temporary basis.

Make sure the taxman is taken care of

As American statesman Benjamin Franklin famously said, “There is nothing certain in life apart from death and taxes.”

So, upon setting your rates, it is important to factor in tax national insurance, plus your pension contribution. Even set these aside if you want real peace of mind.

The legal structure of your contracting operation will have a bearing on the HMRC liabilities which you will need to account for.

If you are set up as a sole trader, taxation is much similar compared with other business structures. This is because you are only required to register for a self-assessment with HMRC and file a yearly tax return giving income and expenses.

Sole trader contractors are often prohibited by agencies over payment deduction fears

However, you will have unlimited personal liability as a sole trader, meaning your personal assets are at risk if you have any financial or legal issues. Also, under the Income Tax (Earnings and Pensions) Act 2003, engaging with sole traders may result in agencies having to ensure PAYE and National Insurance are deducted from payments. 

This is why the majority of recruitment businesses -- including us -- will not engage directly with sole traders.

Setting up and appointing yourself the director and shareholder of a limited company helps to keep your personal assets separate from company liabilities, meaning less risk for you personally.

Negotiations, IR35 and other factors impacting what to charge

It is worth noting that when entering a contract, there may be negotiating to be done; on the rate and other matters.

Generally, the client will be responsible for determining your employment status. For smaller non-public sector clients, you will be responsible for deciding this and whether the IR35 rules apply. If you are inside IR35, then you should always treat income from employment as the limited company paying the worker, subject to PAYE and national insurance.

Further to this, a limited company can be expensive to set up and run as you will have to deal with registration fees, accounting services and potentially higher insurance premiums as well as costs around compliance and reporting. All these outlays will need to be considered when setting a price for your services, particularly on direct-to-client opportunities where you tend to have more flexibility on what to charge and on what basis (daily; hourly or weekly).

Umbrella company pay considerations

Another option contractors have is work via an umbrella company. This is where you become an employee of the umbrella company rather than operating as a sole trader or limited company. Most admin tasks, including invoicing, tax and payroll are then looked after by the umbrella company.

A downside to umbrellas is that many employers only engage umbrella workers after a vetting process to ensure compliance. In our case, we have an approved list of umbrella companies that have passed through a thorough ‘due diligence’ process. An additional downside of brollies in the eyes of some contractors is that they are more taxing than PSC contracting. Again, this financial burden will need to be gauged in advance of you settling on the amount you wish to price your services at.  

Final thought

Setting up as a contractor can feel like an uphill battle at times. However, with enough research, it can offer the financial and personal freedom that you have been searching for – two advantages that can keep on giving, if you get your rates right from the outset and then monitor them closely and be prepared to revise, as the labour market, contractor-demand, and your area of technology all evolve.

Friday 1st Dec 2023
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Written by Alan Lowdell

With over 45 years of experience in finance, of which nearly 20 years have been in the recruitment sector Alan has gained a deep understanding of various industries including transport, logistics, recruitment agency, construction, technology and engineering. Throughout his seven years with Matchtech, Alan has led the UK-based transactional finance teams and is responsible for all pay and bill.

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