One of the main factors for those considering a career in contracting is how much you can earn compared to traditional employment. The fact is that your potential earnings are entirely variable, depending on your skills, experience, location and other factors such as the strength of the market in a particular sector. Setting expectations that are too high could cause contractors to lose out on valuable opportunities, while setting them too low risks undervaluing their skills and reduces the viability of a sustainable career in contracting. In this article, Umbrella Exchange aims to give contractors an overview of the factors they should consider when estimating their earnings.

Calculating your rates

Remember that any income you earn will, of course, be subject to taxation. If you aren’t receiving your earnings through a PAYE system, then you will have to make provisions for paying away your tax at the year end. It’s important for you to understand that, while contract work generally pays more than a permanent job, there will usually be more personal and business expenses involved. Although you might be able to claim tax relief on certain business expenses, you will be expected to foot the initial outlay. There can be considerable costs associated with running your own limited company, while contracting with an agency or through an umbrella company may reduce your overall take home pay in return for the services and benefits they provide. You should also understand that unless you are working through an umbrella company, or similar intermediary that acts as an employer, you are not entitled to statutory benefits such as sick pay or holiday pay and must make your own arrangements while you’re not working. You will also be responsible for your own pension and insurance provisions that may need to be in place to safeguard the services you are offering end clients, or that are required by law for working through your own limited company. All of these factors need to be taken into account when calculating your charge out rate. If you are securing work through an agency then your rate will be determined by your agency as they will be negotiating with the end client to supply your services.

How experienced are you?

You will be hired primarily for your skills and the level of expertise you bring to the table, so you should give your level of experience careful consideration when estimating your earnings. Although you may be new to contracting, this doesn’t necessarily make you inexperienced if you’ve been working in a similar role as an employee. Although contracting requires some level of adaption, as long as you can show that your skills and work experience is directly applicable to a contracting role, you can seek a commensurate level of remuneration.

Are you willing to negotiate?

Although many clients will already have a figure in mind for a project, there is often room for negation. It’s important to learn to value your skills as a contractor, as this will communicate confidence in your ability to the agency and the client. Although building a reputation in the contracting sector is important, you should avoid working for less that you’re worth or doing work for free, as this could have an adverse effect on your future earnings. Many clients and agencies are looking for the best person, not the cheapest, so be confident about the value you bring to a project and use this to negotiate. Even if you’re not the most experienced candidate for a role, you could have particular attributes and skills that the client is looking for. Experience of working in innovative environments or with specialist software can all be used to negotiate. Contractors should become used to marketing themselves, as they will need to do this on a regular basis. Taking the time to find out about the role and the client will help you to negotiate by allowing you to identify the specific value you can bring to a project.

Review your rates for each contract

Many contractors think that once they’ve settled on a rate, then they have to stick with it. In fact, a rate is not the same as a wage, and should be subject to regular review. This is because a contractor’s role will differ with each contract depending on the scope of the project and the client’s expectations. If you feel that your skills are a particularly good match for a specific contract, then your earnings should reflect this. Similarly, with the successful completion of each project your experience will grow, often at a faster rate than if you were an employee completing the same job each day. This is another reason to adjust your earning expectations, as is the achieving of new skills, qualifications and industry accolades.

Working with a recruitment agency

Recruitment agencies can be a valuable resource for first time contractors. Not only can they often provide access to a wider variety of clients, larger companies with lucrative contracts often prefer to use agencies to scale down the interviewing process. Agencies can advise contractors on their earning potential, and often have experience of negotiating with clients, which can be useful for less experienced contractors. When you’re weighing up the value of working with an agency, remember that time spent searching for new contracts or any gaps between projects represent dips in your overall earnings. Many contractors find that agencies help them to achieve regular work, and therefore a higher overall income.

Do some market research

In order to determine how much you can earn as a contractor, it’s important to do some research about your sector. Looking at business literature and industry related articles on sites such as LinkedIn could give you an indication of the general state of the market and which skills are in demand.  You can also ask other people in your business network about how much they earn, but bear in mind that contractors can be guarded about how much they charge, as this can allow competition to undercut their rates. There are several websites that can provide benchmarks according to your sector and region, a good source is Hays 2019 Salary and Recruiting Trends.

By project or hourly?

Whether the clients pays per day, hour, or project will be depend upon the scope and detail of a particular contract. You should think carefully about what the project will involve, for example:

• How much time will the project take?
• What is the scope and depth of the project?
• Will the project involve research and preparation?
• Are you able to work from home or do you have to commute to an office?

It’s crucial to understand that contractors should only charge for the hours that they work. Some contractors knock off additional days and class them as non-billable hours (time spent doing business admin, pitching for work, etc.) while giving themselves a higher day rate to in order to appropriately compensate themselves. Similarly, if a project calls for a lot of research and preparation before the production of a quantifiable solution, you should think about how this will affect your earnings or the overall cost of the project so that you are correctly compensated for your time. Remember to clarify anything that is unclear and specify the terms of the project in a written contract, including your rates of payment, any allowable expenses that the client agrees to cover, and the agreed outcome and timescale for the project.

How will IR35 affect my earnings?

Changes to the off payroll rules mean that from April 2017 the organisation paying the contractor is responsible for deciding whether a contract falls inside or outside IR35. This currently applies to public sector contracts and is set to apply to private sector contracts from 2020. Contractors will need to consider how this impacts on their earnings when they are deciding on whether to accept a contract. If the contract falls inside IR35, contractors will be taxed at the same rate as an employee. Contractors can choose to pay the difference in tax through their limited company and may find the services of a specialist accountant useful. However many contractors find working through an umbrella company that deducts their tax through PAYE to be an easier solution in this situation.

In order to discuss options available to you, please speak to a member of our team on: 0203 393 3881