How to Calculate Your Hourly Rate as a Self-Employed Professional.
When it comes to being self-employed, one of the most important yet often overlooked aspects is how to determine your hourly rate. If you're used to working for a company, you might be familiar with a fixed salary and a predictable pay structure. But as a self-employed professional, you’re not only responsible for the work you do but also for the time you spend on all the behind-the-scenes tasks—tasks that don't immediately lead to income but are necessary to keep your business running smoothly.
The Key Differences Between Being Employed and Self-Employed
1. Benefits of Being Employed
When you're employed, your company usually provides you with a salary, paid time off, health insurance, pension contributions, and a host of other benefits. Your work is typically limited to your role, and all of your time during working hours is spent on the job. Your employer also covers some costs, like office space, equipment, and utilities.
2. The Reality of Being Self-Employed
As a self-employed person, you wear many hats. Not only do you have to work on client projects, but you also need to take on the responsibilities of running the business itself. This includes:
Marketing: Promoting your services, posting on social media, managing your website, and handling advertising.
Invoicing and Bookkeeping: Keeping track of your finances, ensuring you get paid, and managing taxes.
Client Management: Meeting clients, writing proposals, and managing customer relationships.
Business Growth: Planning for future work, researching industry trends, and continuously improving your skills.
As a self-employed professional, your income isn't guaranteed, and you don’t have the benefits of regular monthly pay checks. You have to cover your own expenses and ensure you're saving for the future.
How to Calculate Your Hourly Rate as a Self-Employed Professional
To ensure you’re charging a fair rate that covers both your work and the additional responsibilities of being self-employed, you need to factor in more than just the time spent on client work. Here's how to calculate your hourly rate:
Determine Your Desired Income:
Start with how much you want to earn annually. For this example, let’s say you want a net income of £35,000 per year. (Net income is how much you will earn after everything else has been paid.)Calculate Your Business Expenses:
Include everything that your business needs to function, such as:Office space, utilities, and equipment
Marketing costs (social media ads, website, flyers)
Insurance, licenses, and professional memberships
Taxes, accounting services, and any other miscellaneous costs
Training Courses: Any courses or workshops you attend to improve your skills or expand your business can be considered a business expense. For example, if you attend training to improve your balloon design techniques or learn about new materials, these costs can be deducted as they contribute directly to improving your services.
Account for National Insurance Contributions and Tax:
As a self-employed individual in the UK, you’ll need to pay National Insurance contributions and income tax. Here's an estimate for how much you might owe:National Insurance: For profits over £12,570 (the tax-free allowance), you’ll pay 9% on profits between £12,570 and £50,270, and 2% on profits above that threshold.
Income Tax: You’ll pay 20% on income between £12,570 and £50,270, and higher rates for any income over £50,270.
Let’s calculate the National Insurance and tax contributions for a desired net income of £35,000:
National Insurance:
£35,000 (net income) minus £12,570 (personal allowance) = £22,430
£22,430 × 9% = £2,018.70 (National Insurance contribution)
Income Tax:
£35,000 (net income) minus £12,570 (personal allowance) = £22,430
£22,430 × 20% = £4,486 (income tax)
Total Tax and NI Contributions: £2,018.70 (NI) + £4,486 (tax) = £6,504.70
So, to achieve a net income of £35,000, you would need to earn £35,000 + £6,504.70 = £41,504.70 before tax and National Insurance.
Account for Un-Billable Hours:
As a self-employed person, you’ll likely work fewer billable hours than you think. Your time isn’t just spent delivering client work; there are hours spent on things like:Marketing your business
Admin tasks (invoicing, proposals, emails)
Networking and client meetings
Professional development (training, research)
This time isn't paid directly, but it’s necessary for business growth. Let’s say you want to work 16 hours a week for clients, but you also need to spend 8 hours a week on non-billable tasks.
Calculate the Total Hours Worked:
If you're working 16 hours for clients, plus 8 hours for business tasks, you’re working 24 hours a week, which equates to 1,248 hours per year (assuming 52 weeks of work).Determine Your Hourly Rate:
Add up your desired income, business expenses, and estimated taxes. Here's an example breakdown of how to calculate the total amount you'll need to earn:Desired net income: £35,000
Estimated National Insurance and tax contributions: £6,504.70
Business expenses: £5,000
Total required income: £35,000 + £6,504.70 + £5,000 = £46,504.70
Total hours worked: 1,248 hours (16 client hours + 8 admin/business hours per week)
Hourly Rate = £46,504.70 ÷ 1,248 hours = £37.30 per hour
Why It’s Important to Reflect on Your Rate
Self-employed professionals often underestimate how much time they spend on business activities that don't generate direct income. While it’s important to make sure you’re charging enough for the time you spend working for clients, it’s equally important to recognise the value of your time spent on business management and marketing. By taking all these factors into account when calculating your hourly rate, you ensure that you're not just covering your costs, but also building a sustainable business.
If you are using a Pricing Tool (such as the Interactive Pricing Tool in the Balloon Market resources) you will see that you add in a % for Business Expenses (known as OVERHEADS) so you do not need to do this twice, simply remove the amount from your hourly rate equation above and recalculate your hourly rate less the Business Expenses. For someone working from home, you should allow a minimum of 10% to cover your overhead expenditure.