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Contractor rates - how to determine yours

Every freelance contractor, at some point, must face the question of billable rates...and how to set them.

It's tempting to simply take the equivalent hourly rate you would earn as an employee, add on a few pounds to make up for the additional responsibility and risk of working freelance, and simply quote that - but it's actually a bit more complicated.

It is important to recall that the pay rise you enjoy as a freelance contractor does not come without its own associated burden. Contractor rates are higher because freelancing has its own set of requirements and needs; you are responsible for your own training, your own equipment and ultimately your own workload.

These must be covered by your hourly or daily rate, as well as the expense of licensing and any services you require to operate your company: accountants, tax advisors, legal expenses, indemnity insurance - the list goes on.

It is not unusual for a contractor to discover that even when he has set his rates at nearly one and a half times his salaried wage, he is actually taking home less pay than he would in an equivalent PAYE position.

Keep in mind, when calculating your contractor rates, precisely how much you will need to pay in Employer's National Insurance contributions. It's often surprising just how much this amounts to - or to put that another way, how much your client is saving in Employer's National Insurance by hiring you rather than a permanent employee. Be sure to take account of any equipment you will need to buy, any professionals you need to employ, and any training you will need to maintain your skills at a competitive level.

In addition, remember that you cannot simply multiply your hourly rate by the 37.5 hour work week and the 52 week year to calculate your annual income. In reality, your working week may be shorter, and you will almost certainly not work 52 weeks a year - bank holidays, sickness, and holidays will eat into this figure and leave you with only about 43 to 45 weeks of actual work each year.

Once you've accounted for all of these factors, consider whether your market rate is competitive based on your experience or demand for your skills. It's all very well costing up your services to include the above list, but are you pricing yourself out of the market? Likewise, if there really is a lack of supply for your particular services, there's no need to go in low with your rate and then regret it later on. Remember, proper research is crucial to ensure that your contractor rates are not only fair to your clients, but fair to you as well.

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