A contractor or a new business owner needs to charge more than the equivalent salary, not the same amount. Employment includes holiday pay, pension, sick pay and employer National Insurance, which someone else pays for. On your own, you cover all of that yourself, and you also lose hours every week to admin, sales and the gaps between jobs. As a rule of thumb, a contractor rate should be about a third higher than the salary, and an hourly rate should be based on around 20 billable hours a week, not 40.
Watch Graham talk this through: see the video on LinkedIn
Why £50,000 as an employee is not £50,000 as a contractor
When you are employed, your salary is only part of what you cost. Your employer also pays employer’s National Insurance, holiday pay and pension contributions, and often sick pay and insurance. None of that shows on your payslip, but somebody pays for it.
As a contractor, that somebody is you. Graham’s rule of thumb is that a contract rate needs to be around a third higher than the equivalent salary to stand still. Depending on your sector and where you work, that can be 30%, 35% or 40%.
So if a role pays £50,000, the contract equivalent is at least £65,000, and often closer to £70,000. The difference covers what you now have to fund yourself:
- Holiday: the weeks each year you are no longer paid for
- Pension: there is no employer contribution
- Sick pay: no work means no income
- Insurance, equipment, training and professional fees
What an employer pays on top of a £50,000 salary
The legal minimums alone show where Graham’s third comes from. For the 2026 to 2027 tax year, on a £50,000 salary, an employer pays:
- Employer’s National Insurance at 15% on earnings above £5,000 a year: £6,750
- A minimum 3% workplace pension contribution on earnings between £6,240 and £50,270: about £1,313
- 5.6 weeks of paid holiday, which is 28 days for someone working five days a week
- Statutory sick pay, which since April 2026 is paid from the first day of sickness
A contractor is only paid for the weeks they work. Take 5.6 weeks of holiday out of the year, and you have 46.4 working weeks. To earn £50,000 in 46.4 weeks rather than 52, you need about £6,000 more. Add that to the National Insurance and pension an employer would have paid, and you reach around £64,000 before you have paid for a single day off sick, any insurance, equipment or training. That is why at least £65,000 is a sensible floor.
The same applies from the other side. If you are an employer bringing someone in as a subcontractor, expect their rate to be higher than the salary you would pay an employee, and make sure the arrangement is a genuine subcontract rather than employment by another name. If the contractor works through their own limited company, the off-payroll working rules (IR35) may apply.
Why pricing on a 40-hour week catches new businesses out
Most people starting a business work out their price the way they worked out their salary. Graham gives the example: “I used to earn £52,000. That’s £1,000 a week. I’m going to work 40 hours, so that’s £25 an hour.”
That goes wrong in the first week. A 40-hour week in your own business is not 40 hours of paid work. Some goes to quoting, invoicing, and chasing payment; some to sales and marketing; and some is simply time between jobs. Twenty billable hours a week is a more realistic starting point.
Divide the same £1,000 by 20 hours rather than 40, and the rate doubles, from £25 an hour to £50. Price on 40 hours and you have halved your own value before you start.
Putting the two together
The two points work together. Take the £65,000 floor for a £50,000 role, spread it over 46.4 working weeks and assume 20 billable hours a week. That gives 928 billable hours in a year, and a minimum rate of about £70 an hour before any profit.
That figure surprises most people. It is almost three times the £25 an hour in Graham’s example, even though his example started from a slightly higher salary. It is still only a break-even rate. It pays you the equivalent of the salary you left and covers the basics an employer used to provide. Any profit, and any money to invest in the business, has to come on top.
If you are starting out, read Graham’s 3 things he wishes he had known when starting his business. Pricing is only one of them.
How to work out your rate
- Start with the income you need, not the salary you had, then add the costs an employer used to cover: holiday, pension, sick days, insurance, equipment and professional fees.
- Work out your working weeks. Take out holiday (including bank holidays) and a realistic allowance for illness and training.
- Estimate your billable hours honestly. Subtract admin, sales, travel, and quiet periods. For most people starting, that is 20 to 25 hours a week.
- Divide the first figure by your billable hours over the year. That is your minimum rate, before any profit.
- Check it against the market. If it looks high compared with competitors, look at how you package the work before you cut the rate. Our guide to effective pricing strategy covers how.
If you are VAT registered, remember that your rate is the figure before VAT. Quote it that way so you do not end up paying the VAT out of your own income.
Your price should rise as you grow.
Pricing is not a one-off decision. As the business grows and you take people on, more of your time goes on managing them and less on billable work. Graham’s point is that your prices need to rise to reflect that, so your service price should go up as the business matures.
Review your rate at least once a year, and whenever your costs change. If you are already busy and still not making the margin you expect, read Too Busy? Time to Raise Your Prices. When you set your rate, make sure you know the difference between markup and margin.
If you work through your own limited company, how you pay yourself matters as well as what you charge. Read 3 factors in a tax-efficient directors’ remuneration strategy, and if your income is heading towards £100,000, read The £60k and £100k Tax Traps.
Glossary
Billable hours: The hours you can charge a customer for. Time spent on quotes, invoicing, sales and travel is not billable.
Break-even rate: The lowest price that covers all your costs, including paying yourself, with no profit left over.
Employer’s National Insurance: A tax employers pay on top of an employee’s salary. For 2026 to 2027, it is 15% of pay above £5,000 a year.
Workplace pension: A pension set up by an employer. By law, the employer must pay in at least 3% of an employee’s earnings between £6,240 and £50,270.
Statutory sick pay: The minimum sick pay an employer must pay. Since April 2026, it is paid from the first day off sick.
IR35 (off-payroll working rules): Rules that decide whether a contractor working through their own limited company should be taxed like an employee.
VAT registered: A business that charges VAT on its sales and pays it over to HMRC. Your rate should be set before VAT is added.
Margin: The share of the selling price that is profit. It is not the same as markup, which is the amount added on top of cost.
Related reading
- 3 Things I Wish I’d Known When Starting My Business
- When a Competitor Opens Next Door: How to Respond
- The £60k and £100k Tax Traps: When Earning More Leaves You Worse Off
- Too Busy? Time to Raise Your Prices
- Effective Pricing Strategy
Talk to us before you set your rates
Whether you are going contracting, starting a business or bringing in subcontractors, we can help you work out a rate that covers your costs and leaves a profit. Book a free chat with the team.