Are you earning what you charge? Why UK freelancers might need to hike their rates by 200%
If you’re a freelancer, small business owner, or contractor in the UK, you set your rates, you win clients, and the money lands in your account. But that money disappears faster than a tub of Quality Street chocolates on Christmas Day.
A recent LinkedIn post by accountant Claire Owen-Jones, who is always sprouting useful tips, has shown how only a fraction of your charged rate actually becomes your personal spending money. We look at some sample calculations to show just how little you are really taking home and what to do about it.
Claire’s breakdown suggests that for every £30 you charge per hour, you might only see around £9.90 in your pocket. That’s a sobering thought. It means that many of us might be significantly underestimating what we need to charge to genuinely feel like we’re earning our worth.
So, let’s see Claire’s breakdown and understand why a serious increase in your rates, or a serious look at your business costs, might be essential for your financial well-being.
The anatomy of your hourly rate: where does it all go?
Claire begins by stating in her post, “When setting your hourly rate, keep in mind that only 30% will be your personal spending money. So even if you are booked and blessed, that pile of cash isn’t going to be yours for long.” This isn’t about being pessimistic; it’s about being realistic.
Let’s follow her example with a £30 per hour rate, which represents 100% of your earnings before deductions:
Business expenses (15%): As a “nimble freelancer,” as Claire puts it, you still have costs. This covers everything from software subscriptions and professional memberships to website hosting, office supplies, and even that replacement laptop you needed to buy on credit after dropping your old faithful on the kitchen floor.
Initial charge: £30
After expenses: £30 – (15% of £30) = £25.50 (85% remaining)
Taxes (20% but could be more): The inevitable. Whether you’re a sole trader or a limited company, taxes are a significant chunk. This covers Income Tax and National Insurance Contributions, Corporation Tax. While the exact percentage varies based on your total income and circumstances, Claire suggests “let’s play it safe and say you’ll need to set aside about 20% for tax.”
After taxes: £25.50 – (20% of £30) = £19.50 (65% remaining)
Annual leave (12%): This is a big one that many freelancers overlook. Unlike employed individuals who get paid holidays, you don’t. If you want to take the UK statutory minimum of approximately 5.6 weeks (which is about 12% of a full working year), you need to factor this into your rates. Otherwise, those weeks off are unpaid.
After annual leave savings: £19.50 – (12% of £30) = £15.90 (53% remaining)
Rainy day fund (10%): Let’s face it, things go wrong. Your laptop could give up, a client project might fall through, or you could simply get ill. Claire recommends setting aside 10% for these unexpected bumps in the road, calling it your “rainy day, my computer has blown up’ fund.”
After rainy day fund: £15.90 – (10% of £30) = £12.90 (43% remaining)
Pension contributions (10%): While optional, unless you suddenly become independently wealthy, you need to save for a pension. As a freelancer, you don’t have an employer contributing to your pension, so it’s entirely down to you. Claire suggests “another 10%?” to start building that nest egg.
After pension contributions: £12.90 – (10% of £30) = £9.90 (33% remaining)
The Harsh Reality: £9.90 in your pocket
Let that settle in. Another month of at-home haircuts and leftover Tuesdays.
As Claire says, “This means that every time a client pays you £30, you can only spend £9.90 of it on your own/personal things.”
This is the takeaway. If you’re charging £30 an hour, and you want to truly feel the benefit of that rate, you’re effectively earning a net personal income of £9.90 per hour. When you compare that to the costs of living, saving for the future, and having a buffer for the unexpected, it highlights a shortfall.
What can you do about it?
Claire’s analysis poses two paths for UK freelancers:
Increase your rates: If you want to take home the equivalent of £30 per hour in your personal spending money, you’d need to adjust your initial charge significantly. To end up with £30 (your desired 100%) after all these deductions (which total 67%), you’d need to charge £90.91. That’s £30 ÷ 0.33 = £90.91.
This is a significant jump, but it shows the true cost of freelancing. Will existing clients be on board? Perhaps not right away, so remember this taxing tale the next time you discuss rates with a new client.
Drastically reduce your business costs: While some expenses are unavoidable, can you find areas to trim? Perhaps renegotiating software subscriptions, finding more cost-effective marketing strategies, or making smarter choices about equipment. However, be cautious not to cut corners that might impact the quality of your work or your ability to attract clients.
Never forget your deductions again!
Owen-Jones’s post is a wake-up call. It’s not about being greedy; it’s about surviving and thriving. As freelancers, we often undervalue our time and expertise, especially when starting out. But overlooking these deductions (or not even thinking to factor them in) means you’re potentially working harder for less than you realise.
Take some time to crunch your own numbers. Use Claire’s percentages as a guide, but tailor them to your specific circumstances. Are your business expenses higher or lower? What are your actual tax obligations? How much do you realistically need for holidays and emergencies? And are you investing in your future with pension contributions like you should?
By understanding the true cost of doing business as a freelancer in the UK, you can set rates that accurately reflect your value and allow you to truly earn what you charge.
