Tax & admin · 26 May 2017

Setting your freelance rates as an independent professional

Tax-saving tips
You should never feel like you need to work for free to gain “exposure” and build a good relationship with a client

As a freelancer, knowing what to charge for your work in the beginning can be a struggle. Pitch it too low and you could damage your business’s profitability, too high and you risk being undercut by a competitor.

Your rate can be dependent on your industry, experience and location, among other factors, so everyone is different.

Work out your break-even point

Knowing how much money you need to earn for your business to survive is a great starting point.  Andrew McSparran, a graphic and website designer, found this out the hard way when he found himself “charging next to nothing as I just wanted the business. I agreed the fee for the full job with a client, but it worked out to be less than £3 per hour”.

Your break-even point is the minimum amount you need to be earning, per day, in order to cover all your costs (without net loss or gain).

Here’s how to calculate your personal break-even point:

  1. Add up all the outgoings associated with your business per year

This could be rent/mortgage, insurance, subscriptions, web hosting, postage costs – anything that costs you money.

  1. Add up the amount of billable days that you think you can work per year

Out of the 365 days in a typical year there are 261 working days (Monday to Friday). From that 261, you should deduct the amount of holidays/days off you expect to take in that year. If you’re not sure, go for around 28.

Don’t forget about setting aside time for your business development and admin too – tax, invoices and estimates all take time, although using accountancy software can really help you speed up these processes.

  1. Divide the sum of your yearly outgoings by the sum of your yearly billable days

This figure is your personal break-even point. Don’t forget, this is the bare minimum you need to earn, and you should always be aiming to charge a healthy amount over this figure to safeguard your business.

Example: How Lucy calculates her break-even point daily rate

Lucy is a photographer. She is looking at her profit and loss account to work out her break-even point.

It shows outgoings for the year of:

Camera consumables £5,060
Printing and mounting £9,873
Insurance £1,024
Travel £3,765
Accountancy fees £600
Business use of home £450
Total costs £20,772

She works out that her billable days are 231 per year.

That means her break-even point is £20,772 ÷ 231 = £89.92.

Lucy must earn at least £89.92 per day in order to break even. Anything above this is profit.

Build in a financial buffer

The plus sides of freelancing are numerous, but unfortunately you aren’t entitled to the safety net of holiday pay, sick pay and similar benefits.

You might also be faced with periods of downtime between jobs, which could cause your earnings to drop.

Your freelance rates need to reflect this uncertainty and include a buffer that can cover you during your business’ quieter times.

As a starting point to work out a day rate that includes a buffer, the Association of Independent Professionals and the Self-Employed (IPSE) recommends that you take the salary that you would earn as an employee in a similar role and add a third, which accounts for the added costs that being a freelancer can entail.

So, if you earned £30,000 as an employee in a similar role, then adding on a third of this takes you up to £40,000. You can then divide £40,000 by the number of days you would expect to work in a year (as discussed above under “Work out your break-even point”).

This should give you an idea of a ideal minimum day rate.

No matter how new you are to freelancing and how flexible you want to be, you should never feel like you need to work for free to gain “exposure” and build a good relationship with a client.

The Freelancer Club, a group run by IPSE to support the creative community, asks both freelancers and companies to pledge not to apply or post unpaid work, while also providing listings of paid work and resources to help freelancers.

You don’t have to charge every client the same

The freelance rates you charge can depend on a variety of factors outside of the work you are being asked to do. It might be affected by the size and budget of the client, for example.

Martin Bean, a developer and consultant, suggested that you “look into the client – if it’s a limited company, you can find its age and key financial statistics such as turnover and any debt for free online”.

Past experience with clients also matters. If you’ve worked with a client before and know that they’re great to work with and will pay you on time, you might want to give them a preferential rate.

Conversely, for a first-time client who is more of an unknown quantity, you might want to quote a higher rate to cover yourself for the possibility of any unexpected problems.

At the end of the day, it’s your business, your rules. Camilla Grey, a strategist, summed it up like this: “If you love your client, charge what seems fair. If you know it’s going to be a nightmare, charge what makes it worth it to you.”

For further advice around setting freelance rates, take a look at how you can keep your finances in check

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ABOUT THE EXPERT

Emily Coltman is chief accountant to FreeAgent, provider of cloud accounting software for freelancers, micro businesses and accountants. She is passionate about helping the owners of small and growing businesses to escape their “fear of the numbers” and she translates small business finance and tax into practical common sense speak.

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