How much to charge as a day rate? Becoming self employed

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I used to work full time but left two years ago to look after my SEN child. My work have asked me to go back as a contractor, so I have some flexibility about when & how much I work. I've never been self employed, so I now need to figure out all the logistics. I plan to set up a sole trader and now I need to tell them how much my day rate will be (or rather, my hourly rate as I only plan to work 5-6 hours a day).

From googling I found a calculator which suggested I take my full time salary, add 30%, and divide by 220. This gives me a day rate of £325. Assuming a 7.5 hour day that gives £43 per hour.

I appreciate I'll need to keep back some money to pay for tax, do a self assessment each year, probably set up a separate bank account to track income & expenses and that I won't be getting any benefits like holiday pay, sick pay, pension etc. I don't actually expect to incur any expenses as I'll be working from home, just talking to clients and working on documents (although I know you can claim some electricity, internet etc as expenses when doing taxes).

Are there any other suggestions for how to calculate a day rate? Anything else I haven't thought of in terms of costs or extra considerations I should build in?

You need to look at what the market rate is for the work and your skill set.

Too many variables. For example your annual salary might cover a 30 hour week, a 40 hour week or a 50 hour week.

But to give you an idea a tradesman who earns £19-20 per hour would be charged out to clients at £38-40 per hour.

Contractors usually get paid a lot more per day than employees because of lack of consistent work, possible need for insurance, cover own training, expenses, accounts etc etc which they’re responsible for. It also depends hugely on industry. In finance 15 years ago I know someone who was on £1000 a day. I know a local authority solicitor on £17/hour. Without knowing your industry impossible to say. Anyway, very exciting times. Good luck.

See this is why I started from my annual salary. I'll be doing the same job and was being paid the market rate, I just need to convert it from an annual salary to a day rate (taking into account that I won't be getting any benefits etc)

Are you happy with the £325 figure? What would the contact be, daily hire as and when, rolling weekly or in 3/6/12 month blocks?

I don't want to be too specific, but it's along the lines of working in sales for a consultancy. Very large global company. Not the financial or legal industry, slightly more niche. I had worked there for 15 years, on & off, before I left.

If you Google it you can find various websites that'll work it out for you. So you can put in the annual salary and ask it to calculate your 'outside IR35) day rate. Or hourly rate. They take into account what you'll need to compensate for annual leave, national insurance etc.

Also I set myself up for consulting last year. In my case it was temporary but I just set up a Monzo business account and a QuickBooks account and it does most of your accounting for you. You can link the Monzo account, generate invoices and track income and expenditure automatically from your account.

To be honest I'm happy with anything, all I'm doing at the moment is watching Netflix so any money is bonus money. But I'd be irked if I was earning less than before, given I'd be doing the same job.

So far they have been vague about the quantity of work and I will want more specifics on this before I agree. I'm hoping for school hours, a few days a week, either ongoing or for a fixed term so I know what to plan for.

My annual salary was 37.25 hours a week, 5 weeks holiday, good benefits including health insurance, plus 20% bonus and sales commission.

As PP's have said you need to look at the market and competitor rates. On LinkedIn find as many freelance recruiters and feeds as possible and look at what day rates similar roles are offering.

Also you need to charge a day rate, not an hourly rate. It's not like you will be able to work for the extra 1 or 2 hours they aren't paying. And it sounds like they are paying you for your performance and delivery - not clocking in and out. Day rate all the way.

Day rates look like lavish when initially comped against a salary but you need to consider NI, tax, pension, holidays, healthcare, job security and legal protection, benefits, paying an accountant, insurance, networking / marketing yourself, time spent looking for work, risk and waiting for invoices to be paid and chasing them up.

It does depend what you want out of it and how well it fits into your life - whether this is a handy gig to have on the side given your circumstances, need for flexibility, will keep your skills and contacts etc etc, whether you want it to be quite part time with gaps anyway, or whether you really need to earn properly

But I'd use rough doubling as a rule of thumb as pp said if otherwise you'd be open to a non-contract job as there will be downtime - and check HMRC rules re self-employment if there won't be!

That hourly rate sounds low to me for a professional role as well.

As others have said, you need to know the going consultancy rate - the easiest way is to ask others what they’d charge.

The big employment benefit you’ll miss out on is employer’s pension contributions, so factor buying a decent pension into your rate.

My day rate is £500 plus expenses, which makes me competitive but not under-priced. I don’t have an hourly rate, it’s either a full or half day, but if I did it’d be based on a 7 hour day. I’m more often paid a fixed consultancy fee, but it’s based on that day rate. The industry wage rate for similar work is c200 a day, plus employer’s NI & pension contribution.

Thank you, this is good perspective. I feel like most of this doesn't apply to me, because honestly I have no intention of marketing myself or working for any other company - I just want to dip back into my old job. But of course they/HR won't know that, and I suppose they'll be used to paying other consultants much more for all those reasons.

Everything I'm hearing is suggesting I should charge more rather than less - which is useful given when they first asked me my instinct was to just divide my salary by 365!

You say you used your annual salary as a starting point - did you add your bonus? Will you still be eligible for commission?
Maybe a better starting point would be your P60.
Also, you left 2 years ago, so you might want to add on a few percent cost of living rise as well.

I don't know anyone personally in my industry who's self employed so I'm struggling to know the going rate (hence this post!). I've browsed job sites but they never give a day rate, and I expect most contractors are sourced through networks rather than recruitment agencies.

I've tried glass door, linked in, are there any other websites I could try and find my industry on?

Great point - no I did not include my bonus or commission which would have increased it significantly. I did think about the cost of living etc and concluded I didn't deserve to be paid any more than 2 years ago because while the industry has moved on, I haven't, and I'll need to do quite a bit of work to get back up to speed.

It's so hard to fight the imposter syndrome when you've been out of work for so long! I must get my career head back on.

You need to be clear if you’re setting yourself up as self-employed or as a contractor. HMRC treats them differently:

https://www.gov.uk/employment-status/selfemployed-contractor

Also, will the work you’ll be doing short or long projects? If they’re short, then you maybe need to look at a higher daily rate than if it’s a longer, continuous one.

Best advice I was ever given when I became self-employed was never to undersell myself. Always charge more than you think you should! I’d also try and find out what your company is paying other contractors (assuming that they use them) and make sure that you’re being paid an appropriate equivalent.

Do you think a man would conclude they didn't deserve to be paid more!
You say you'll have some catching up to do, but presumably you'll be doing this on your own time and in fairly short order. So are you going to go back to them in a couple of months and put your prices up because you're up to speed now and 'worthy' of the going rate?
They must value you to want to use you as a contractor, they've obviously missed what you can provide and they're still going to be getting a bargain because they'll not be paying you full time and they'll be saving on your benefits package.
Don't sell yourself short.

Thank you for this! I didn't realise a contractor could technically be an employee. I'm confident that in this case they intend for me to be self employed, as they asked me to set myself up either as a sole trader or limited company. I will make sure I'm clear on this before I agree to anything though.

I know, I had exactly the same thought as I was typing it.

This thread has been so valuable, I'll probably earn twice as much as I would have otherwise!

It needs to be higher than your salary was to include other overheads such as insurance as well as other benefits such as employer NI and pension contributions.

Be very clear you understand the difference between being a sole trader and a limited company as well - it can be important. It might be worth trying to talk things through with an IFA or a solicitor before you start, if you can. Or find someone who acts as an adviser to business start-ups. These are all really crucial things to consider along with how much you’re going to charge.

you also need to factor in how many days annual leave you intend to have and increase the day rate to cover that

Please be aware that HMRC do not like self employed people only working for one client, they feel you should be on PAYE. I worked for an Accountant and had clients who were investigated and told they can’t be self employed if you do this.

Yes, and they have been tightening up recently too. You need to look at the IR35 regulations and make sure you are genuinely self-employed.