Going freelance is one of those decisions that looks obvious on paper. You're billing 500/day instead of earning 60k/year. That's 130k if you work 260 days. Easy money, right?
Not even close.
I've watched developers make this leap without running the numbers properly, and the ones who struggle almost always made the same mistake: they compared their gross freelance rate to their net employee salary.
Here's the math they missed.
The Hidden Costs of Freelancing
When you're employed, your salary is the tip of the iceberg. Your employer is paying:
- Employer National Insurance (13.8% on earnings above the threshold)
- Pension contributions (minimum 3%, often 5-10%)
- Holiday pay (28 days minimum, roughly 11% of working days)
- Sick pay, parental leave, training budget
- Equipment, software licenses, office space
A 60k employee typically costs the employer 72-80k. That's your real compensation package.
The Freelance Rate Equation
To match a 60k salary as a freelancer, you need to account for:
1. Billable Days Are Not Working Days
There are roughly 260 working days in a year. Subtract:
- 25-30 days holiday (you still want time off)
- 5-10 days sick or personal
- 20-40 days for admin, marketing, invoicing, chasing payments
- 10-20 days between contracts (bench time)
Realistic billable days: 180-200 per year
2. Tax and National Insurance (UK)
As a sole trader or limited company director, your tax structure changes completely:
- Corporation tax (25% on profits over 50k via Ltd)
- Self-assessment tax and NI (sole trader)
- Dividend tax if extracting via Ltd
- No employer NI subsidy
- VAT registration (mandatory above 90k turnover)
3. Benefits You Now Pay For
- Professional indemnity insurance: 300-600/year
- Public liability insurance: 100-300/year
- Pension contributions: you fund 100% now
- Equipment and software: 1,000-3,000/year
- Accountant: 1,000-2,500/year
- Co-working space: 0-4,000/year
4. The Real Minimum Rate
Taking a 60k salary with typical benefits (pension, holiday, NI):
Total compensation value: roughly 75,000
Divide by 190 billable days: 395/day minimum
That's just to break even with your old job. To actually come out ahead and compensate for the risk and instability, most advisors suggest a 40-50% premium, putting you at 550-600/day.
The Contractor vs Employee Decision
The calculation gets more interesting when you factor in:
- IR35 status (inside vs outside, massive tax difference)
- Career progression (no promotions, but no ceiling either)
- Mortgage applications (lenders want 2-3 years of accounts)
- Compound effects (employer pension matching is free money you're walking away from)
I built a contractor vs employee calculator that handles the full comparison, including tax differences, pension, insurance, and bench time.
Setting Your Rate
Once you've decided to go freelance, pricing is the next trap. Most developers either:
- Undercharge because they anchor to their salary
- Overcharge and can't find work
- Don't adjust for market, location, or specialization
The formula I recommend:
```n Target annual income (post-tax)
- All business costs
- Tax provision (set aside 25-30%)
- Risk buffer (10-15%) = Required gross revenue
Required gross revenue / Billable days = Day rate
A [consulting rate calculator](https://boring-math.com/calculators/consulting-rate-calculator) makes this concrete. Plug in your target take-home, expenses, and tax situation, and it gives you the day rate you actually need.
For US readers, the W2-to-1099 conversion is similarly brutal. Self-employment tax alone is 15.3%, and you lose employer healthcare contributions. A [freelance rate calculator](https://boring-math.com/calculators/freelance-day-rate-calculator) that accounts for these differences is worth using before you hand in your notice.
## When It Makes Sense
Freelancing *does* make financial sense when:
- Your skills command a rate premium (specialist > generalist)
- You can maintain 80%+ utilization (strong network or niche demand)
- You're disciplined about saving for tax and retirement
- The flexibility has genuine lifestyle value to you
It doesn't make sense when:
- You're optimizing purely on gross numbers
- You haven't built a network yet
- You need mortgage approval in the next 2 years
- You undervalue employer benefits
## Run Your Own Numbers
Generic advice only goes so far. Your situation has specific variables: your tax bracket, your employer's pension match, your realistic utilization rate, your insurance costs.
Tools that helped me think through this:
- [Contractor vs Employee Calculator](https://boring-math.com/calculators/contractor-vs-employee-calculator) - side-by-side comparison with full tax treatment
- [Consulting Rate Calculator](https://boring-math.com/calculators/consulting-rate-calculator) - work backwards from your target income
- [Freelance Day Rate Calculator](https://boring-math.com/calculators/freelance-day-rate-calculator) - quick rate calculation with expense factoring
The math isn't complicated. But it is easy to get wrong if you skip the boring parts.
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