The formula in one line
Hourly rate = (take-home ÷ (1 − tax rate) + business costs) ÷ billable hours a year
The money parts are fairly easy to find. The last one is about time, and it's where most rates go wrong.
Step 1: the income you need
Start with what you want to take home in a year: what you'd need as a salary to live as you do now, plus what you want to save. If you're leaving a job, your old salary is a starting point, but remember what the employer paid on top: pension, health cover, paid holidays, sick days, equipment, training. As a freelancer you pay all of those yourself.
Step 2: your costs, and tax
Add everything the business pays for in a year: software and subscriptions (AI tools included), hardware spread over its life (a laptop over three years, say), insurance, an accountant, bank and payment fees, a workspace if you rent one, training, and a website.
Then tax. It depends on where you live and how your business is set up, so the calculator asks for a rough percentage rather than pretending to know, and applies it to what's left after costs. If you're unsure, ask an accountant for your effective rate; it's one short conversation that changes the answer more than anything else here.
Step 3: billable hours, honestly
A year has 52 weeks of 40 hours: 2,080 hours. You won't bill 2,080 hours. Take off, in order:
- Time off. Holidays, public holidays, sick days. Four to six weeks is common.
- Gaps between clients. Some weeks you'll be between projects. Look at how often that happened last year.
- Non-billable work. Sales calls, proposals, invoicing, admin, learning, the website you keep meaning to update.
The arithmetic: six weeks off leaves 46 working weeks, and if 60 to 75% of a 40-hour week is billable, that's roughly 1,100 to 1,400 hours a year. A slow year can be much less. Don't take our arithmetic; measure yours. If you've tracked time before, look at last year's billable total. If you haven't, track a month, every hour, billable and not, before you trust the number.
If you work with Claude Code or Codex, time you spend directing and reviewing an agent is working time. A tracker that drops it as idle makes your billable hours look lower than they are. More in how to bill clients for AI agent time.
A worked example
Only an illustration. Use your own numbers.
| Take-home income wanted | 60,000 |
|---|---|
| Tax, 30% of profit | 25,714 |
| Business costs | 6,000 |
| Revenue needed | 91,714 |
| Working weeks (52 minus 6 off) | 46 |
| Billable hours a week (of 40 worked) | 25 |
| Billable hours a year | 1,150 |
| Hourly rate | about 80 |
Notice how much the hours matter. At 30 billable hours a week the rate drops to about 66; at 20 it rises to about 100. A few hours a week of admin or gaps moves your rate more than your software bill ever will.
Checking it against the market
The calculator gives you a floor: the rate the business needs. It doesn't tell you what clients will pay. Check it against what people with your skills charge in your market (ask peers directly; it's less awkward than it sounds), what the work is worth to the client, and how much you want the work.
If the market rate is well below your floor, the answer is usually not more hours. It's a different offer: a niche, a fixed-price package, or a different client.
Hourly, day rate or fixed price
- Day rate: the hourly rate times the hours in your working day, often 7 or 8. Good for longer engagements.
- Fixed price: your estimate of hours times the rate, plus a margin for risk. Track your time anyway, so you learn whether your estimates hold.
- Retainer: a block of hours a month, paid in advance, often at a small discount.
Whatever you choose, keep a record of your real hours: it's how you'll know next year whether to raise your rate. The free timesheet template does it in a spreadsheet. Hourbrook does it on a Mac without timers: it notices what you worked on, drafts the timesheet, and makes the invoice from what you log.