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Defaults assume 46 working weeks, leaving 6 for holiday, bank holidays and gaps between contracts. Contractors cover their own holiday, sick pay, pension, insurance and equipment out of the rate, and IR35 status changes the tax treatment substantially.
What The Day Rate Calculator Works Out
- Annual gross income: day rate x days per week x working weeks. At GBP 400 a day, five days a week for 46 weeks is GBP 92,000, not the GBP 104,000 that 52 weeks suggests. Experienced contractors plan on 44 to 46 billable weeks to cover holiday, bank holidays, illness and gaps between contracts.
- Monthly / weekly: the annual figure divided by 12, and the day rate multiplied by days per week.
- Roughly equivalent salary package: annual income divided by 1.25, because an employee's package includes paid holiday (worth about 12%), employer pension (3% minimum, often more), sick pay, insurances, training and equipment that a contractor buys from the rate. A rough rule divides contract income by 1.2 to 1.3.
- Employee benefits allowance (advanced): override the built-in 25% haircut. Use 20% for a bare-bones comparison or 30% to 35% against an employer with a generous pension, bonus and private medical cover.
- Hourly equivalent (advanced): the day rate divided by the hours in your working day, which matters when a client expects 10-hour days for a rate priced on 7.5.
- Income after business costs (advanced): annual income less professional indemnity and public liability insurance, accountancy, software, equipment and training. GBP 1,500 to GBP 4,000 a year is typical for a limited company contractor; umbrella workers pay a weekly margin of GBP 15 to GBP 30 instead.
- Day rate on the invoice (advanced): with VAT registration you add 20% to invoices, collect it and pass it to HMRC. It is not income, but registration is compulsory once turnover passes the threshold and some clients expect it.
- Day rate needed to match a salary (advanced): the target salary grossed up by the benefits allowance and spread over your billable days. The reverse rule of thumb is that a fair day rate starts around the target salary divided by 200 to 220 working days, then plus 20% to 30%.
- Tax is a separate question: inside IR35 or through an umbrella, income is taxed like employment with employer NI effectively coming out of the rate; outside IR35 through a limited company, profits flow as salary plus dividends after corporation tax. Revisit the rate annually: employees get pay reviews and contractors forget to.
Further reading: GOV.UK: working for yourself.