Most UK freelancers know their day rate. Far fewer know their profit margin — the share of each sale they actually keep after costs and VAT. That gap is where pricing goes wrong. You can feel busy all month and still end the month with less than you expected, simply because the margin was thinner than the headline price suggested.
Profit margin is not the same as markup, and mixing the two up is the most common pricing mistake I see. Markup is profit expressed as a percentage of cost. Margin is profit expressed as a percentage of the selling price. If a job costs you £80 to deliver and you charge £100, your markup is 25 percent but your margin is 20 percent. Both numbers describe the same £20 of profit, but they answer different questions, and quoting the wrong one when you set prices quietly undercharges you.
VAT makes the confusion worse. If you are VAT-registered, the price your customer pays includes VAT that belongs to HMRC, not to you. A £120 invoice at the standard 20 percent rate is £100 of your revenue plus £20 of VAT. Work out your margin on the £120 and you will overstate it. Work it out on the £100, after deducting your real delivery costs, and you get the honest number. If you are not VAT-registered, the calculation is simpler, but you still need to separate what you spent delivering the work from what you kept.
A simple way to run the numbers is to take one typical job and walk it through four steps. First, write down the VAT-exclusive selling price. Second, subtract every direct cost of that job: subcontractors, materials, software you bought for that project, travel. Third, subtract a fair share of your overheads, such as accountancy, insurance and tools, spread across the jobs you do in a month. Fourth, divide what is left by the VAT-exclusive selling price and multiply by 100. That is your net margin for that job. Do it for your three most common job types and you will usually find one of them is carrying the others.
The result often surprises people. A service that looks profitable at £500 a day can sit below a 20 percent margin once subcontractor time and software costs are counted. A smaller, simpler job with almost no delivery cost can beat it. Knowing this changes which work you chase, which clients you reprice, and where a small price rise does the most good. Raising the price of a low-margin job by 10 percent often adds more profit than winning an extra low-margin job.
There is also a floor worth knowing. If your margin consistently sits below the level that covers tax, quiet months and time off, the business is fragile even when revenue looks healthy. A margin check once a quarter is a cheap early warning system: it tells you to reprice before a bad quarter forces the issue.
If you want to run the numbers for your own prices, try this UK profit margin calculator and enter a real job, not a hypothetical one. Use your last invoice, your real costs, and the VAT treatment that actually applies to you. The honest number is more useful than an optimistic one, because it is the number your pricing decisions should be based on.
Top comments (0)