Most people who go self-employed set their first day rate by asking around, or by taking their old wage and dividing by working days. Both methods tend to land too low, for the same reason: they assume every working day earns money.
It doesn't. Quoting, driving to the merchant, chasing invoices, doing the books, holidays and the odd sick day all take time nobody pays you for. This article sets out a simple way to build those days into your rate, with a worked example. The figures below are for illustration only. Put in your own.
Step 1: decide what you want the business to pay you
Start with the yearly income you want to take out of the business before tax. Income tax and National Insurance come out of that figure, so don't use your take-home target, or you'll undercharge by the amount of your tax bill.
For the example: £35,000.
Step 2: add up a year of business costs
This is everything the business pays for that isn't you:
- van finance or depreciation, fuel, insurance and servicing
- public liability and any other insurance
- tools and their replacement
- phone, software, accountant
- trade memberships, certificates, training
- workwear and PPE
Materials you charge on to customers don't go in here, because each job covers those.
For the example: £9,000.
Step 3: count the days you can actually bill
This step makes the most difference, and it's the one most people skip.
- Working weeks: 52 minus holidays. England and Wales have eight bank holidays, and you'll want some time off as well. Say 46 weeks.
- Days a week: say 5.
- Share of days you can bill: be honest. If one day in four goes on quoting, admin, travel between jobs that pay nothing and waiting on materials, that's 75%.
Billable days = 46 × 5 × 0.75 = 172.5 days.
Step 4: divide
Day rate = (target income + yearly costs) ÷ billable days
= (£35,000 + £9,000) ÷ 172.5
= about £255 a day.
At eight billable hours a day, that's about £32 an hour.
Compare that with the naive version, which spreads the same £44,000 over every working day (46 × 5 = 230 days). That gives about £191 a day. The gap is roughly £64 a day, and it's the gap between hitting your income target and falling well short of it while feeling busy all year.
Step 5: sense-check it against the market
The number from this method is a floor, not a market rate. It tells you the least you can charge to hit your target. Then compare it with:
- what established local firms charge for similar work
- how much demand you have (a full diary for months ahead usually means you're cheap)
- whether you can raise the share of billable days instead of the rate, for example by batching quotes, invoicing from your phone on the day or cutting dead travel
If the market won't pay your floor, something has to give: costs, target income, days worked or the type of work you take on. It's better to know that now than in January when the tax bill arrives.
Markup and margin: two words people swap without noticing
Once you have a labour rate, most trades add a markup on materials. This is where a second common mistake creeps in.
- Markup is profit as a share of cost.
- Margin is profit as a share of the selling price.
Add 20% to £100 of materials and you sell them for £120. That's a 20% markup, but the £20 profit is only 16.7% of £120, so the margin is 16.7%. A 25% markup gives a 20% margin, and a 100% markup gives a 50% margin.
It matters when a supplier, accountant or lender talks about margin and you're thinking in markup. To turn a target margin into the markup you need:
markup = margin ÷ (100 − margin) × 100
So for a 20% margin you need a 25% markup.
Some trades don't mark up materials at all and build all their profit into the day rate. Both approaches work, as long as the sums add up to the income you planned in step 1.
Where VAT fits
Work out your day rate before VAT. If you're VAT registered, quote the rate before VAT and add VAT on the quote and invoice. If you're not registered, there's no VAT to add, and you shouldn't show any. Registration becomes compulsory once your VAT-taxable turnover goes over £90,000 in a rolling 12 months.
For construction work for VAT-registered contractors, the domestic reverse charge and CIS deductions also change what lands in your account, though not what you should charge. That's a subject for a separate article.
Review it once a year
Costs move: insurance renewals, fuel, a new van. Recalculate your rate at least once a year, and whenever a big cost changes. Put the date in the diary alongside your MOT.
Tools if you want them
You can do all of this on the back of an envelope. If you'd rather not, there's a free day-rate calculator on The AI Till that uses exactly this method, plus a markup and margin converter. Both run in the browser with no sign-up.
The method itself is the useful part: price for the days you can bill, not the days you work.
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