After years spent working in permanent employment, many people decide to take the plunge and move into uncharted freelance territory.  Whether you take on an ad hoc freelance project or a longer term, interim contract, in many cases this will mean working on a day rate basis for the first time.  But if all you’ve ever known is a salary, how do you begin to calculate your day rate?

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Day Rate Calculator

We use a calculation that is a ‘rule of thumb’ in the interim management sector:

(£Your annual basic salary +30%) ÷ 220 days

• The uplift of 30% is to allow for lost benefits. As a day rate contractor you will only get paid for the days you work, so no standard benefits such as holiday or sick pay apply; nor many of the additional cash benefits enjoyed by permanent employees such as pension contributions, car allowance, and other cash or in-kind benefits.

• 220 days is an estimate of the total number of days you are likely to work in a year, as a day rate contractor (of course this can depend on gaps between contracts, the time you choose not to work etc).

So, for example, if your current basic salary is £50,000, your calculation would be:

£50,000+30% = £65,000 ÷ 220 = £295 per day (typically rounded up to £300).

It’s worth pointing out that this is just a guide and day rates can vary, depending on the organisation, the sector, the length of the contract and other factors. As you get more familiar with the freelance market, you’ll get a sense for what different types of projects and roles require, and how the day rate reflects that.

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Your Payment Options

When it comes to getting paid for freelance work, the three most common and practical options are: setting up your own Limited Company, signing up to an umbrella company, or simply speaking to the business or agency about PAYE, via payroll.

To make things slightly easier we have outlined each option below and included some useful links to introduce you to the processes involved:

Limited company

Many businesses and employment agencies will require you to have set up your own Limited Company – sometimes referred to as a Personal Services Company – to get paid for your work. This is because they want a ‘business to business’ relationship, rather than engaging with you directly as a self-employed worker. Registering your own Limited Company is a very straightforward process, but you will also need to apply for a business bank account and take advice from an accountant – preferably one specialising in Personal Service Companies.  It is also important to note that you will need to protect your company with professional insurance. Professional indemnity insurance is crucial, while Employer’s Liability and Professional Liability Insurance is optional depending on the business. Your accountant can offer guidance on this.

Companies House will provide you with everything you need to know about starting, running and closing a company.

If you think your company is likely to make more than £85,000 in gross fees per year, then you will also need to become VAT registered with HM Revenue & Customs (HMRC). If you’re not sure how much you’re likely to make, you can register for and pay VAT retrospectively, when you reach the threshold. Read more here.

If you’d like to learn more about setting up as a limited company, the Interim Management Association has more detailed information.

Umbrella companies

An umbrella company is basically a payroll service which acts as an intermediary between you and the business you’re working for, whether this is the ‘end client’ or an employment agency. It is very quick and easy to register with an umbrella, so it can be a great option if you need to jump into a contract quickly but are unsure whether you want to set up a Limited Company, or whether you will be doing freelance work for the long haul. It offers the convenience of being a permanent employee with the independence of going solo.

The only catch is you have to pay for the service, as well as having tax and National Insurance taken at the source from your day rate (PAYE). Umbrellas charge an administration fee which varies from company to company, so it’s worth shopping around and asking for recommendations from other freelancers and employment agencies. Make sure you read up on the complexities of umbrella companies before you decide to go down this route.

PAYE

As you know from your permanent employment, PAYE is the standard way for HM Revenue & Customs to collect Income Tax and National Insurance from individuals in employment. As a freelancer, you may find that you will be employed directly by your end client, or by an employment agency, which means you will pay tax and National Insurance at source.

For more information on PAYE, Gov.uk has a useful introduction on the basics.