How To Work Out Your Self-Employed Daily Rate
Author: Russell SmithSeptember 23, 2015
Do you run a business and aren’t sure what to charge customers? Our accountants offer advice for small business owners on this exact problem.
Everyone has a daily rate, yet many of us just don’t have to think about it.
If you are an employee, your workplace will often either pay you by the hour or by a fixed annual salary. All you must do is a simple calculation to work out what your daily rate is.
Things are a little more complicated for a business owner, however.
Self-Employed Daily Rates
As a self-employed individual, you must understand your daily rate as it allows you to control your annual income. Employees have their income set, thus, they are able to adapt their lifestyle to their daily rate. But you, as a business owner, you set your own daily rate, which makes things a little more complex.
Let’s say you require £40,000 each year to pay your bills, keep up with your mortgage and maintain your current lifestyle. There are roughly 1,950 working hours in the year — 52 x 37.5 hours. £40,000 divided by 1,950 is £20.51 per hour. So this should be your day rate, right? Wrong!
What Your Daily Rate Needs to Cover
There is one significant difference that separates the daily rate of a business owner from an employed individual: added benefits.
When you are employed by a business, you receive your daily rate in the form of payment, yet this is not where you stop costing the business money. Employers are responsible for a number of other financial commitments relating to your employment:
- Sick leave
- Training costs
- Socialising with fellow employees
- The times when you just muck about
- National Insurance
Simply put, Employment covers lots of things that self-employment will not.
As you are employed by yourself, you are responsible for filing in these financial gaps. Your future clients will not pay you for any of these — not the holidays, not the sick pay, not for you to socialise and get to know them — so you must plan ahead.
To ensure you aren’t left having to work every day of your life, unable to take a week’s break or afford to retire, you must work out a daily rate that allows you to cover the same costs as traditional employers.
This requires a bit of maths and a lot of careful thinking.
Working Out Your Daily Rate
The last thing you want to do is alienate customers and potentially lose business, by charging excessively high prices. However, if you don’t make some adaptations to your daily rate, you’ll be stuck working harder but earning less than if you were making the same salary through employment.
Let’s go back to our aforementioned salary of £40,000.
If you take into account holiday time —- let’s say 22 days personal and 8 days statutory —
this equates to approximately a month of unpaid work (still less than the UK average of 5.6 weeks). So, if you still want to take holidays as a business owner, you’ll need to increase your £20.51 rate to accommodate this one-month absence. This month out is equivalent to 9% of your income, thus, your rate must rise 9%, to £21.82.
Your salary is still £40,000 a year, but now you have a month of holiday time.
The average worker in the UK takes 1.85 sick days per year, which you can also choose to include. If you also wanted to start a pension plan, a good number would be roughly 10% of your total income. If you include these costs, you are looking at over £24 an hour.
At this adjusted daily rate, you’re actually level with an employee who makes £40,000 a year even if you thought you are actually bringing in £46,000 a year.
Our Conclusion on Daily Rate
It is always a good idea to adapt your daily rate to match, even if it means charging customers a little extra.
The benefits of employment aren’t something you should just be sweeping aside in favour of lower prices, they should all hold an important place in your life and be budgeted for accordingly — yes, even holiday time.
As accountants tailored to helping small business owners, we’re always on hand to offer advice on issues like this. If you want direct advice on how to tailor your specific daily rate, please do get in touch.