How do I calculate my daily rate?

You need to spend time working out your daily rate before you come face to face for the first time with prospective clients.

When working out your daily rate, keep in mind that your former employer incurred extra costs over and above your gross salary, and these costs will now have to be paid out of your fee income. They fall into four categories:

  1. Employer’s NI, which as an employer (all be it employing yourself) you will now have to pay out of company funds (i.e. fee income)
  2. Other items which are not personal benefits but which will now have to be paid for out of company funds, such as
    • Accountant’s fees
    • IT equipment, broadband, etc
    • Office stationery, telephone, etc
    • Annual professional indemnity (PI) insurance
  3. Personal benefits that will now have to be paid for out of company funds, such as:
    • Pension contributions
    • Private health insurance (although this has P11D implications)
  4. Personal benefits that will now have to be paid for out of your net salary, such as:
    • Personally owned car

You should be realistic about the number of days in the year that you are likely to work. Having done the calculation, you also need to be realistic about the fee you intend to charge, particularly if this is your first assignment and you have yet to prove yourself.

As a starting point, you might choose to start with your latest gross salary. To that you should add all the extra costs outlined above, and then divide the total by the number of days in the year that you anticipate working in order to arrive at a daily rate. You could refine this by producing one rate for short assignments and another for longer assignments where the number of days is more or less guaranteed.

Above all, remember that your daily rate includes an amount that will be used to pay Employer’s NI contributions, and in negotiations you may need to point out to clients that whilst they will not be paying Employers NI on top of the fees they pay you, it must instead be paid by you out of the fees they pay you.

Be quite clear about how much of your daily rate will go to you and how much will be paid as tax and NI, as it is counterproductive to grumble about it later on! As a guide, taking the year as a whole, you might expect that just under half of the total amount you devote to payroll will go to HMRC as tax and NI (Employee’s NI and Employer’s NI). Obviously, however, the more you earn the more tax you will have to pay.