How to Price Your Services as a UK Small Business
Pricing your services is one of the most uncomfortable decisions small business owners face — and one of the most consequential. Charge too little and you undervalue your work. Charge too much without justification and you lose business. Here’s how to get it right.
Start with your costs — not your competitors
How to price your services as a UK small business starts with a simple principle: until you know what it costs you to deliver your service, you can’t know whether any given price is profitable. The most common pricing mistake is looking at what competitors charge and copying them — without first checking whether that price works for your own cost base.
Work through these five steps to calculate your minimum viable price:
Fixed costs are what you pay regardless of how much work you do — rent, accountancy fees, software subscriptions, insurance, marketing, and loan repayments. Add these up on a monthly basis.
Variable costs change depending on how much work you take on. For a service business, these might include materials, subcontractor costs, travel, and per-project expenses. Estimate them on a per-project or per-day basis.
Many sole traders forget to pay themselves properly. Your salary isn’t a luxury — it’s a cost of running the business. Decide what you need to take home each month and include it in your calculations.
Once you’ve covered all costs, including your salary, build in a profit margin — money that stays in the business for growth, emergencies, and tax. A minimum of 10–20% profit on top of costs is a sensible target for most service businesses.
You don’t work every hour of every working day — admin, business development, holidays, and sickness all eat into available time. A realistic figure for most service businesses is 60–70% of available working time being genuinely billable. Divide your annual costs by your billable days to get your minimum day rate.
What daily rate should you charge?
If you work as a contractor, consultant, or freelancer, a day rate is the most common way to price your time. Start with the salary you’d expect as an employee in a similar role, then apply the contractor uplift.
The contractor uplift
As a contractor or sole trader, you pay your own National Insurance (both employee and employer rates), your own pension, your own holiday pay, and your own sick pay — with no employment security. A commonly used starting point is to divide your target annual salary by 200 to get a rough day rate, then add at least 30–40% to account for these additional costs.
Check the market
Use LinkedIn, Glassdoor, and sector-specific job boards to see what contractors in your field are charging. Recruitment agencies that place contractors are also a useful source — they’ll often tell you the going rate for your type of work.
A note on IR35
If you work through a limited company and the engagement looks like employment, IR35 rules may apply — meaning HMRC treats your income as employment income rather than company income. This significantly affects your take-home pay and should be factored into your rate. An accountant who specialises in contractor tax is worth consulting if you’re unsure. We cover IR35 in more detail in a separate guide.
Pricing strategies for UK service businesses
Once you know your floor price, you need a strategy for how you position your pricing in the market. These are the approaches most commonly used by UK small businesses:
| Strategy | How it works | Best for |
|---|---|---|
| Cost-plus | Add all costs together and apply a profit margin on top. Simple and safe but ignores market rates and perceived value. | Businesses with predictable costs in price-sensitive markets |
| Competitive | Research competitors and price at, slightly above, or slightly below their rates. Risks anchoring to others rather than your own value. | Commoditised services where clients compare providers easily |
| Value-based | Price based on the value you deliver to the client, not your cost. A consultant saving a client £100k can charge far more than their hourly rate implies. | Consulting, marketing, legal, and professional services with measurable outcomes |
| Premium | Deliberately price above market average to signal quality. Only works if you can back it up with credentials, results, and a matching client experience. | Specialists, niche experts, and businesses with strong reputations |
| Project-based | Quote a fixed price for the whole project rather than by time. Clients prefer the certainty; you’re rewarded for working efficiently. | Creatives, developers, designers, and anyone with defined deliverables |
Should you charge by the hour or by the project?
Both have merit. Hourly pricing is transparent and protects you if a project takes longer than expected. Project pricing gives clients certainty and rewards your efficiency — if you finish faster than expected, you earn more per hour.
For most service businesses, the advice is to move away from hourly billing over time. When you charge by the hour, you’re essentially penalised for getting faster and more experienced. Value-based or project pricing better reflects what you’re actually delivering.
How to raise your prices
Underpricing is a trap that’s easier to fall into than to get out of. Raising your rates can feel daunting, but it’s usually more straightforward than you expect. Here’s how to do it without losing clients:
- Raise rates for new clients first. Test your new pricing on incoming work before rolling it out to existing clients. Lower risk, and it builds your confidence that clients will accept it.
- Give existing clients notice. A professional email explaining that your rates will increase effective from a specific date, with 30–60 days’ notice for ongoing work, is all that’s needed. Most long-standing clients accept a reasonable increase without complaint.
- Don’t apologise. Many small business owners undermine their own rate increases by hedging or qualifying. State the new rate clearly and professionally.
- Tie increases to value. If you can point to results you’ve delivered — time saved, revenue generated, problems solved — a price increase becomes a conversation about value rather than cost.
- Raise rates regularly. An annual increase in line with inflation is far less disruptive than a large jump every few years. UK inflation has been running at 3–4% in recent years — if your rates haven’t moved, your real income has fallen.
Handling price objections
When a client says “that’s more than we expected” or “can you do it for less?”, it’s worth having a clear approach rather than instinctively discounting.
Sometimes the gap is smaller than the initial reaction suggests. Understanding their expectation lets you respond appropriately — you may be able to bridge it without changing your rate.
If budget is genuinely an issue, offer a reduced version of the work at a lower price rather than doing the same work for less money. This protects your perceived value and avoids setting a precedent.
A client who opens every negotiation by pushing back on price is often signalling how they’ll behave throughout the relationship. Not every client is worth winning at any price.
A note on VAT and your pricing
If your annual turnover is approaching or exceeds £90,000, you are required to register for VAT. This changes your pricing conversation significantly:
| Your client type | Impact of VAT registration | What to do |
|---|---|---|
| VAT-registered businesses | No effective price change — they reclaim the VAT you charge | Add VAT to your invoices and keep your rates the same |
| Consumers or non-VAT businesses | Your prices increase by 20% from their perspective | Consider absorbing some of this or phasing the increase in advance |
The key is to think about VAT registration before you hit the threshold — a sudden 20% price increase upon registration can feel jarring to clients who haven’t expected it. Speak to your accountant as you approach £90,000 turnover so you can plan ahead.
Useful tools and resources
- HMRC’s tax and NI calculators — useful for working out what you need to earn gross to hit a net take-home target at gov.uk/estimate-income-tax
- Contractor day rate calculators — search “UK contractor day rate calculator” for tools that model inside vs outside IR35 take-home scenarios
- Your accountant — before setting your pricing for the first time, a one-off conversation with an accountant is worth the investment. They can help you model different scenarios and make sure your pricing covers all your tax obligations.
More guides for UK small business owners
Right Hand Man covers everything from pricing and cash flow to hiring your first employee and writing a business plan. Browse our guides or get in touch if you have a question.