The PCG has supplied some practical budgeting advice for the fledgling PAYE umbrella contractor, which will also be of use to everyone considering the step from salaried employment to contracting through umbrella companies or limited companies.

It is no secret that contractor income tends to fluctuate from month to month, so it is vital to get a clear handle on average monthly earnings in order to budget properly. For those who have been contracting for a year or more, this is straightforward: just divide annual income by 12. Take care if earnings are usually around £1,000 per month and a ‘freak’ month pops up where it soars to £5,000, as it would be a mistake to conclude that average monthly earnings are £1,300.

Rookies who are just starting out will not have this option and will have to keep a finger on their financial pulse as they earn. It is wisest, says the PCG, to err on the side of caution while doing this. This might involve some thrifty living in the early months – baked beans on toast rather than smoked salmon and champagne. Things may get more relaxed and permit some luxuries as a more accurate picture of reliable income builds up.

Calculating essential monthly expenditure is a must. That means working out how much must be set aside for mortgage, groceries, car insurance etc. Try and include 10% for savings, and it is crucial not to forget about tax (umbrella contractors do not need to worry about this as it is calculated automatically).

Lastly, place all earnings into a business account and only pay a regular amount each month into a personal account based on these calculations.

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