Although the tax benefit associated with working via a company has gradually been eroded over the years, there is still a significant financial cost if your work is caught by IR35.
While there have been calls for and promises of a review of the IR35 rules, off-payroll working rules are currently set to change on 6 April 2020.
Things are different if operating via a PAYE umbrella company. A contractor is an employee of its chosen umbrella employer and with that comes a responsibility for the umbrella firm to provide all normal HR functions of any employment relationship.
Umbrella employers provide contractors with full employment rights, all statutory benefits including holiday pay, maternity pay, paternity pay, sickness pay, pensions, redundancy pay and adoption pay. The contractor has the best of both worlds.
It’s no secret why contractors leave the idea of a permanent full-time job behind. As an independent contractor:
They have the power to earn more
The flexibility to pick and choose their own clients
Not to mention the favourable tax treatment for limited company business owner.
The problems start to arise when contractors are looking to secure a financial loan.
As a contractor, many lenders will look at your proof of earnings and label your application ‘high risk’ because:
You don’t have a ‘typical’ payslip from an employer,
Your income may look a bit more irregular compared to someone working a traditional nine-to-five.
The stability and benefits of being employed whilst also having the freedom and flexibility to undertake contract work for numerous end-clients.
Even when undertaking placements for different recruitment agencies, there is continuity of employment. This history can be particularly important for anyone looking to access personal finance such as mortgages or loans.
For anyone working on very short-term contracts or working for multiple clients simultaneously, the umbrella consolidates earnings from the various assignments into one pay packet.
This means that all tax and national insurance contributions are taken care of together for the contractor, rather than having to consider earnings from each assignment separately.
How Are Contractor Mortgages Calculated?
It’s a misconception that contractors need to have at least three years of accounts to get a mortgage because they are actually approved based on their day rate. When determining how much you are eligible to get for your mortgage, we consider your contract rate as the basis of your application rather than using the accounts you are currently working with. Often, all the paperwork we will need to see from you are your bank statements, proof of ID, and your contract.
There’s another misconception that freelancers and contractors end up paying a higher interest rate because of their self-employed status, but in reality, it’s all dependent on the deposit you can put down. If you save up more money for a larger deposit, you can receive lower mortgage rates. On the opposite side of this, if you’re struggling to put down a larger deposit, keep in mind that you can put down as little as 5% and still receive an assessment for a mortgage. You may need to pay a higher interest rate, but you won’t be rejected for your loan and will still be able to purchase your property.
The team at Kyle Financial is here to help. We do things a bit differently than your average high street mortgage broker, and we will work to secure you a contractor mortgage.
We know how much stress can be involved with contracting, let alone combining that stress with trying to secure lending for a new home. Whether or not you already own property, the process of buying a home is never an easy one. We understand the types of issues you can face, and we’re here to take you through the process from start to finish. That includes finding you a competitive interest rate and explaining all of your mortgage options as a freelancer or contractor.
Our goal is to help any contractor, freelancer or independent professional secure financing, whether they’re buying their first home, upsizing, downsizing, becoming a landlord with a buy to let property, remortgaging to get a better interest rate or to access their equity, working through a government scheme like Help To Buy, or are struggling with poor credit.
What you should do about safeguarding your family.
So what if you have your mortgage sorted? You can look after your family with life cover with tax benefits. You are responsible for paying for everything from your income but often this is the only thing not insured we will look at this with you. You don’t have to go back to work if you are sick or worry about loss of income. If you suffer a very serious illness such as heart attack, stroke or cancer this might be life changing but it doesn’t have to mean sell up move out and the end of your home and holidays.
Before taking a decision one way or the other all current contractors should seek professional advice. This will be about their mortgage requirements but it is essential to talk about keeping your home and standard of living when life happens. We will review the existing cover to see whether it is still appropriate or needs to be changed. For example, for those who maintain their personal service company, it will be important to maintain any protection that already replaces the normal employee benefits, e.g. Income Protection, death in service via a Relevant Life Policy or private medical insurance even though they may be taxed differently.
For those choosing a different operating model, advisers should consider the portability of existing arrangements. For example, if they have a relevant life policy, how easy is it to continue as a personal policy? If they currently have company sponsored income protection, can this be continued on a personal basis?
If you don’t have such cover, may we remind you how vulnerable you are by not having cover. If you decide to put cover in place now, we will make sure it’s arranged in a way that it is flexible enough to cope with future changes in your employment status.
Maybe you already have the home and the buy to lets maybe this is the year you make sure you life is life proof.
Your Next Steps
At Kyle Financial, we don’t consider contractors and freelancers ‘high risk’ like other high street brokers do. We believe contractors should be viewed the same as any other full-time employee, and working via a limited company or an Umbrella Company shouldn’t hinder your mortgage application. The process may not be as daunting or complicated as it seems once you have someone in your corner who knows the process inside and out, guiding and advising you on your next steps and what you need to be successful. Let our team of experts be in your corner.
We’re here to find you a mortgage option that will work for you in your current situation and in the future, in case your financial situation changes. We want to make sure you’re set up for success. Feel free to call us to book your consultation to get started on your contractor mortgage process.