Self-employed applicants can expect a rollercoaster of emotions and hoops to jump through in securing new or additional funding for their residential and buy-to-let properties. The main sticking point for a while has been the need for two years’ worth of proven income, via accounts or self-assessment tax returns to provide substantial income evidence.
Luckily for this group, a change for the better is on the horizon as this archaic practice may be coming to an end, with an increasing portion of the market moving to use the most recent year’s figures to justify affordability.
A fairer approach
Lenders such as Halifax, Precise Mortgages and Mansfield Building Society, to name a few, are allowing this new criteria check on assessments. This comes as the disparity between employed and self-employed applications was so vast, leading many employed individuals asking: ‘When is the right time to make the career jump to ‘be their own boss’ as the implications for getting the timing wrong could vastly affect future plans?’
Many PAYE employed individuals now only need to provide one month’s worth of payslips and one month of bank statements to be eligible for the affordability check, so this is a move in the right direction to not penalise our business entrepreneurs and level the playing field for all potential applicants.
One aspect that self-employed directors need to be aware of is their ability to use retained business profits to boost their affordability credentials. Many of our savvy business owners know that leaving money in their businesses will allow them to save on a hefty tax bill at the tax year end date.
Number crunching
This keeps the business healthy, but on their personal income it will show a much more diminished view of their finances. By applying to the right lender, they can keep that capital in the business along with showing the right lenders they can afford more than their take-home salary and dividends originally show.
Most directors of small companies I deal with usually have a generic and efficient way of maximising their income potential by drawing down dividends via this model.
They use their tax-free personal allowance as no income tax is payable below £12,570 per year. Thereafter, the basic rate of income tax is 20 per cent from £12,570 to £50,270 with a dividend drawn down from the business, while unlike your salary, national insurance contributions are not applied to dividends.
Dividend tax rates have the same bands as income tax, but different tax rates for each band. Personal allowance (up to £12,570) – tax-free, basic rate (£12,571 to £50,270) – 8.75 per cent, higher rate (£50,271 – £125,140) – 33.75 per cent.
This allows the individual to really optimise their financial appeal to prospective lenders to secure their mortgage goals and hopefully alleviate hefty tax burdens they may face each year.
