Recent shifts in IR35 intermediary tax legislation have notably altered the treatment of contractors over the past year.

These changes have led to a greater number of self-employed individuals being classified as employees, obliging them to adhere to the same tax regulations as permanent staff. This move is part of the government’s initiative to combat tax evasion.

Under IR35, it’s now the responsibility of private employers to classify these workers as contractors or regular employees.

Consequently, an increasing number of contractors are now remunerated through umbrella companies. These entities serve as payroll solutions, handling tax contributions for the employee, simplifying the process but potentially leading to higher tax liabilities for the contractors.

Mortgage Affordability: From Net to Gross Income Umbrella company employees receive net payments, with income taxes and National Insurance contributions already deducted. This is a departure for some contractors accustomed to gross payments, where they would manage their tax contributions independently.

However, this transition from gross to net income calculation should not overly concern those applying for a mortgage. Despite potentially lower income figures, lenders continue to assess mortgage affordability based on gross income.

Essentially, being paid on a net basis does not preclude you from mortgage eligibility.

Mortgage Application Process Umbrella companies usually provide payslips, which lenders utilize to determine your mortgage affordability. Lenders typically request three to four payslips and bank statements, similar to the process for traditionally employed individuals.

If you have a contract through an umbrella company, lenders will also likely ask for this documentation.

Different lenders vary in their openness to term contractors, with some giving particular attention to the length of your contract when making lending decisions.

Challenges with Umbrella Companies Operating through an umbrella company means you are regarded as an individual, foregoing the typical benefits associated with running a limited company, such as accumulating company funds or receiving tax-free dividends.

Additionally, some umbrella companies employ unconventional payment methods, potentially complicating mortgage applications. While regular salary payments are common, others may offer a basic salary plus significant commissions. Lenders might not fully consider this commission-based income when assessing mortgage affordability.

We’re Here to Assist We understand that these regulatory changes can be daunting for contractors accustomed to operating as limited liability companies. If you’re concerned about securing a mortgage post-IR35 alterations, our team is ready to assist, regardless of your IR35 status.

We’re well-versed in how these changes impact your mortgage eligibility and offer consultation without any fee for our services.