Why Your Hourly Rate Is Not the Same as Your Wage
Written for the UK tradesperson, but the principles apply in most English-speaking countries.
A customer hears that you charge £40 an hour and does a quick sum in their head: 40 hours a week, that's £1,600 a week, over £80,000 a year. More than they earn. No wonder they think you're expensive.
The problem is that many tradespeople make the same mistake. They think of their hourly rate as their wage, feel guilty about charging more than their friends earn in a job, and set their rate far too low.
Your hourly rate is not your wage. Your wage is only one of the things your rate has to pay for. This post explains what else it covers, and shows with a worked example why a self-employed tradesperson has to charge well over twice an employee's hourly pay to end up with the same income.
What an employee's wage doesn't show
When someone is employed, their wage is only part of what they cost. Their employer also pays for:
• Paid holidays and bank holidays
• Sick pay
• Employer's National Insurance contributions
• Pension contributions
• The van, fuel, insurance and servicing
• Tools, equipment and workwear
• Training and qualifications
• Public liability and other insurance
• Phones, software, office staff and accounts
• The time spent quoting, ordering materials and sorting out problems
The employee never sees these costs, but they're real, and they add a large amount on top of the wage. When you're self-employed, there's no employer. You pay every one of them yourself, out of your hourly rate.
You don't get paid for every hour you work
An employee is paid for every hour they're at work, and for their holidays as well. You're only paid for the hours you charge to customers.
The hours you spend quoting, travelling to price jobs, collecting materials, doing paperwork, chasing payments, maintaining the van and waiting between jobs are all unpaid. So are your holidays, bank holidays and any days you're off sick.
As a rough example, 46 working weeks at 40 hours is 1,840 hours a year. Take out the non-chargeable time and many sole traders are left with around 1,250 hours they can actually charge for. Your rate has to earn a full year's income in those 1,250 hours.
Your business has costs of its own
On top of your own income, your rate has to pay your business overheads: insurance, tools, van costs, phone, software, accountant, advertising, trade memberships, training and workwear. Materials are charged separately on each job, but everything else comes out of your hourly rate.
Your business needs a profit
If your rate only covers your income and your overheads, your business breaks even and makes nothing. There's no money for a replacement van, a quiet month, a broken tool, or growing the business. Profit is what your business earns on top of paying you. Your income is a cost of the business, not its profit.
A worked example
Say you want to earn the same as an employed tradesperson on £34,000 a year, and your business overheads are £8,500 a year.
Step 1: Add your income and overheads.
• £34,000 + £8,500 = £42,500 a year
Step 2: Divide by your chargeable hours.
• £42,500 ÷ 1,250 hours = £34.00 an hour
This is your break-even rate. Charge less than this and you lose money.
Step 3: Add profit. Adding 20% on top:
• £34.00 + 20% = £40.80 an hour
Now compare that with the employee. They earn £34,000 for 52 weeks of 40 hours, which is 2,080 paid hours, including their holidays. That works out at £16.35 an hour.
So to end up with the same income as an employee on £16.35 an hour, you need to charge £40.80 an hour. That's two and a half times as much, and it isn't overcharging. It's what it costs to run a business that pays you the same as a job.
What happens if you charge your wage
Now suppose you think of your rate as a wage and charge the same £16.35 an hour:
• 1,250 chargeable hours × £16.35 = £20,437.50 a year
• Less £8,500 overheads = £11,937.50 left to live on
You'd work the same hours as the employee and take home about a third of what they earn, with no holiday pay, no sick pay, no pension and no profit. This is how skilled, busy tradespeople end up working all week and still struggling for money. Leaving out overheads, overestimating chargeable hours and treating wages as profit are three of our 20 common pricing mistakes tradespeople make.
How to work out your own rate
1. Decide the income you need for a year, before tax.
2. Add up your yearly overheads: everything except the materials you charge to jobs.
3. Work out your realistic chargeable hours: total working hours less holidays, bank holidays, sick days and non-chargeable time.
4. Divide your income plus overheads by your chargeable hours. This is your break-even rate.
5. Add your profit on top.
Use your own figures, not the ones in this example. Your costs, hours and income needs are different from anyone else's. Once you know your rate, our guide on how to price a job properly shows you how to use it to build a full price.
Explaining your rate to customers
You don't have to justify your hourly rate to every customer, and you certainly shouldn't apologise for it. Many tradespeople avoid the conversation altogether by quoting a fixed price for the job rather than an hourly rate. The customer then compares the total price and what it includes, not your hourly figure against their own wage.
A clear, professional quote does a lot of this work for you. Our guide on how to quote like a professional shows you how.
The short version
An employee's wage doesn't show the holiday pay, sick pay, pension, National Insurance, van, tools and overheads their employer pays on top. When you're self-employed, you pay all of these yourself, from fewer chargeable hours, and your business still needs a profit. That's why your hourly rate has to be far higher than an employee's hourly wage. Charging your wage as your rate means working the same hours for a fraction of the income.
Find out what you really earn per hour
TradeProfit starts with your real costs. Enter your hourly rate, monthly overheads, van costs and working days once. It takes under three minutes. Then every job shows your true profit after labour, materials, travel and overheads, and your dashboard shows how much you're really recovering per hour across all your work. If your rate is too low, you'll see it straight away. It's free for your first 10 jobs, and no credit card is needed.
Know your real profit on every job.
Want to go further? The Complete Guide to Running a Profitable Trade Business has a full section on calculating your charge-out rate. Its free profit toolkit includes calculators for your chargeable hours, labour costs and charge-out rate, so you can work out your own figures.