How to Work Out Your Hourly Rate When You’re Self-Employed

Written for the UK scenario, but the principles apply in most English-speaking nations.

If you are an employee, working out your hourly rate is simple: divide your yearly salary by the hours you work in a year. On £30,000 a year for 37.5 hours a week, that is £30,000 ÷ (37.5 × 52) = about £15.38 an hour.

If you are self-employed, that sum will lose you money. Your hourly rate has to pay for far more than your wages: your van, tools, insurance, phone, and all the hours you work but can’t charge for. Most tradespeople who struggle financially are not short of work. They are charging a rate that never covered their real costs.

This guide shows you how to work out your hourly rate properly, step by step, with a worked example.

Why you can’t work it out the employee way

An employee’s hourly pay is only part of what they cost their employer. The employer also pays for their van, tools, insurance, holiday pay, sick pay, pension contributions and training. When you work for yourself, you pay for all of that.

There is a second, bigger trap: you can’t charge for every hour you work. As a self-employed tradesperson, you also spend time:

• driving between jobs and to suppliers
• visiting customers to quote, including for jobs you don’t win
• answering calls and messages
• invoicing, chasing payments and doing your books
• maintaining your van and tools

None of that time is paid. On top of it, you get no paid holidays, bank holidays or sick days. So the hours you can actually bill a customer for are far fewer than the hours you work. Your hourly rate has to earn a whole year’s income from those billable hours alone.

How to work out your hourly rate: step by step

1. Add up your yearly business overheads. Everything the business costs to run, apart from the van: insurance, tools and equipment, phone, software, accountant, trade body or scheme fees, workwear, advertising, training and bank charges.
2. Add up your yearly vehicle costs. Depreciation or lease payments, insurance, tax, fuel, servicing, repairs and tyres. For a typical trade van this is a large figure, and it is easy to underestimate.
3. Decide the income you need. This is what you want to pay yourself for the year, before tax. Include enough to cover your tax and National Insurance, and to put money aside for a pension and for quiet spells.
4. Add those three together. That total is what your work has to bring in each year just to break even.
5. Work out your real chargeable hours. Start with the weeks in a year, take off holidays, bank holidays and an allowance for illness, then estimate how many hours a day you can genuinely bill a customer for, after travel, quoting and paperwork. Be honest: this is where most rates go wrong.
6. Divide the total by your chargeable hours. The answer is your break-even hourly rate: the least you can charge without losing money.
7. Add profit. Break-even is not a business. Add a profit on top, so the business has money for growth, new equipment, bad debts and the unexpected.

Worked example

Here is the sum for a self-employed tradesperson working on their own.

Chargeable hours:

• 52 weeks, less about 7 weeks for holidays, bank holidays and illness = 45 working weeks
• 45 weeks × 5 days = 225 working days
• They work 8 or more hours a day, but after travel, quoting and paperwork, only about 4.7 hours a day can be billed
• 225 days × 4.7 hours = about 1,050 chargeable hours a year

Break-even hourly rate: £63,000 ÷ 1,050 hours = £60 an hour.

With 20% profit added: £60 + £12 = £72 an hour.

Now compare that with the employee-style sum. If this tradesperson had simply assumed 40 hours a week for 52 weeks (2,080 hours), they would have worked out £63,000 ÷ 2,080 = about £30 an hour. Charging £30 when they need £60 just to break even, they would work flat out all year and still lose money.

Turning your hourly rate into a day rate

Don’t just multiply your hourly rate by eight. When you book a full day on one job, you lose less time to travel and quoting, so more of the day is billable.

Instead, work out your day rate from the same total. Divide what you need to cover in a year by the number of full days you can realistically book. In the example above, if 210 of the 225 working days could be booked as full days (leaving time for quoting and admin), the sum is £63,000 ÷ 210 = £300 a day to break even, or £360 a day with 20% profit.

Check your rate against the market

Once you have your figure, look at what other local tradespeople in your trade charge. Then:

• If your rate is close to theirs, good. You can charge it with confidence, knowing it covers your costs.
• If your rate is higher, don’t simply cut it. Look for costs you can reduce, ways to fit in more billable hours (jobs closer together, less unpaid quoting), or a better service that justifies a higher price.
• If your rate is lower than theirs, you are probably undercharging. Raise it.

Cutting your rate below break-even to win work is the quickest way to go out of business while being busy.

Frequently asked questions

What’s my hourly rate if I’m self-employed?

Add up your yearly overheads, vehicle costs and the income you need, then divide by the hours you can actually charge a customer for in a year. Add profit on top. That is your hourly rate.

How many chargeable hours should I allow?

It varies by trade, but many self-employed tradespeople can bill only around 1,000 to 1,300 hours a year, far fewer than the 2,000 or so hours they actually work. Track your own time for a few weeks to get your real figure.

Should my hourly rate include VAT?

Work out your rate without VAT. If you are VAT registered, add VAT on top when you quote or invoice.

How often should I review my hourly rate?

At least once a year, and whenever a big cost changes, such as fuel, insurance or a new van.

Is a higher hourly rate going to lose me customers?

Some, perhaps, but usually the ones who only want the cheapest price. Customers who value reliable, quality work expect to pay a fair rate, and a rate that covers your costs is what keeps you in business to do that work.

Your next step

Work out your own figure in minutes with the free Charge-Out Rate Calculator: www.tradeskillshubacademy.com/profit-tools.

The Complete Guide to Running a Profitable Trade Business goes further: working out your true overheads and vehicle costs, measuring your chargeable hours, estimating labour, pricing materials and presenting your price with confidence.

Check out TradeProfitApp where you can ensure you know the profit you make on every job.