How do day rates work? A guide for contractors and employers

If you are working as a contractor through an umbrella company or a limited company, you will need to know how a day rate works and compares to an hourly rate, as well as the pros and cons of each. By weighing up the different types of payment rate, you may be able to decide which approach works best.

For professionals who are working as contractors, it is important to think carefully about how you wish to be paid, if you have the freedom to choose. It is also essential when navigating your next assignment, or if you're a business hiring short-term expertise. 

Charging at a day rate or hourly rate can make a big difference to how much you earn and the number of hours you will end up working. As a contractor, it will be up to you to understand the different types of rates and find the option that will work best for yourself and your client base.

In this guide, we break down what day rates are, how they work in the UK, and what both contractors and employers need to know.

What does day rate mean? 

A day rate is a fixed amount of money paid to a contractor for each day they work. Unlike salaried employees, contractors are usually not entitled to benefits like paid holidays, pensions, or sick pay. Instead, the day rate compensates for both their time and the lack of employment perks.

For example, if a contractor agrees to a day rate of £400 and works five days a week, they would earn £2000 per week (before tax and deductions).

Day rate contracts are often used for:

• Freelance or interim assignments.

• Project-based work.

• Specialist expertise required short-term.

There are a number of benefits to this model that lead many contractors to charge on a day rate basis:

• Contractors are usually able to charge a higher rate and earn more money than if they were charging by the hour.
  
  
• Many clients favour daily rates as it makes calculation and budgeting easier, allowing them to commit to a certain amount no matter how many hours are worked.

However, there can also be disadvantages to charging a daily rate:

• Clients can sometimes take advantage of day rate contractors by asking them to regularly work extra hours, as they feel they are able to do so without having to pay extra.
  
  
• In order to protect yourself when charging on a day rate basis, it is advisable to specify a maximum number of hours that you are able to work within a set period as part of your contract. This will give you more leeway to charge extra for overtime.

How does day rate work in the UK?

In the UK, day rate contracts can vary depending on whether the contractor is:

• Working through a limited company (outside IR35).

• Working through an umbrella company (inside IR35).

• Operating as a sole trader (less common for professional roles).

Key points to consider

• IR35 legislation: Determines whether a contractor is considered a genuine independent supplier (outside IR35) or a 'disguised employee' (inside IR35). This affects how tax is paid.

• Payment terms: Contractors typically invoice weekly or monthly, and payment terms may range from seven to 30 days.

• Tax and deductions: Contractors need to account for income tax, National Insurance, and business expenses unless paid via an umbrella company, which deducts these at source.

What is an hourly rate?

Contractors who charge an hourly rate bill their clients for the total number of hours they deliver, and will usually invoice at the end of each week for every hour worked.

Hourly rates tend to be more common than daily rates, and are the norm among more junior contractors or projects with a lower budget. Generally, an hourly rate system will be used for your work.

There are a number of reasons why the hourly rate model has become so commonly used by contractors and clients:

• An hourly rate offers clarity on the costs of the project, allowing contractors to charge for the exact amount of time they worked on it.
  
  
• Unscheduled overtime is rare when working an hourly rate, as any additional work to be carried out will need to be specifically reviewed and approved by the client.

These advantages will need to be weighed against the potential downsides inherent to this pay model:

• An hourly rate can be perceived as risky for clients, as they provide less certainty for them as they may not know upfront how much time the project will take and what they will need to pay. This can lead to costs spiralling if the contractor needs to put in more hours than expected.
  
  
• Because the client will need to pay extra for additional hours, they may be more reluctant to agree to overtime when it is needed, or more likely to scrutinise your delivery to ensure their time is not being mismanaged.

As with daily rates, contractors who intend to charge an hourly rate should ensure that they set expectations with the client in advance, and ensure that mutually agreeable terms are laid out clearly in the contract before any work is delivered.

Should I charge a day rate or an hourly rate?

When considering whether to charge a day rate or an hourly rate, there is no simple right or wrong answer. It will depend on the specific details of the job, the expectations of both parties, the timescales involved and whether you have the flexibility to choose.

In order to decide which pay model will work the best, ask the following questions:

• How much do you expect to be paid for the work? What is the client's budget? Do your salary expectations fit into their budget?
  
  
• How much should you be looking to charge to cover all of your necessary business expenses as a contractor?
  
  
• Do you know exactly how long the work will take? Would you prefer to determine this on an ad hoc basis, or plan each hour in advance?
  
  
• Do you favour the security of knowing you will be paid a fixed rate, even if you complete your work early, or would you prefer to be able to charge for any extra hours you may need to work?
  
  
• What agreements is the client willing to put in place to cover longer assignments, unsociable hours or work carried out beyond the advertised hours?

By determining which pay model you will choose, you will be able to work with your recruitment company to find roles that will suit your preferred method of working and payment. Deciding whether to charge a day rate or an hourly rate may also affect how umbrella companies assess your weekly salary and calculate any sick pay and holiday pay entitlements you will receive from them, so it is best to provide clarity on this as soon as possible.

Pros and cons of day rate contracts for employers

Pros:

• Fast access to specialist skills.

• Flexibility without long-term commitment.

• No employer NI or benefits cost (unless umbrella).

Cons:

• Potentially higher daily cost.

• Less control over long-term availability.

Day rate contracts can be beneficial for both employers and contractors when managed correctly. If you're unsure about day rate expectations or how they align with IR35, it helps to speak with an expert.

Find out more

To learn more about day rates vs hourly rates and how to determine the most effective way to charge for your services, get in touch with Sellick Partnership.