November marks six months’ since HMRC’s off-payroll working rules change, one of the biggest issues that have faced contractors in many years.
As a contractor specialist mortgage broker, one of the areas that our clients seek advice around, is whether a change in working circumstances will adversely affect their borrowing chances, whether a new contract, new client, or most commonly in 2021, a change of payment structure.
Given the potentially huge financial difference between the various payment structures, the decision to move from Limited Company to Umbrella, or between Umbrella companies is understandably a big one.
“As a contractor specialist, there are many areas in which the information and advice that we give our clients can impact them financially, none more so than the manner in which they receive their contract income” says Andy McBride, director of Professional Contractor Mortgages. “Understandably this year with the rule changes from HMRC, the biggest one of those is whether it impacts borrowing potential whether inside or outside of IR35.”
“The short answer is no, however there are certainly some things to be aware of that can be hidden hazards when it comes to mortgage underwriting.”
The decision to take on a role inside IR35 with such scrutiny from HMRC now is a big one. In theory, being paid via an umbrella company is no different to being paid via a Limited Company for mortgage purposes, as lenders will be assessing income from your contract, rather than payslips.
Due to the many ways that Umbrella companies have operated historically, however, there are minor differences that can have a big impact at underwriting stage.
“A true Contractor Mortgage is one where income assessment is taken from the contracted daily or hourly rate, rather than looking specifically at what is received after deductions” adds McBride. “Naturally, the range between Umbrella company and Limited Company contractors can be enormous in terms of how much they personally receive, for many reasons.”
“One crucial factor to consider for mortgage funding if inside IR35, is the way in which your Umbrella company actually pays you, and how this is recorded.”
When assessing income for an Umbrella contractor, lenders will look at how your pay is broken down and what is deducted. Whether Umbrella margins, employer deductions or income tax deductions, it is important to know exactly what these are in order to ensure you are assessed fairly.
“While there are some lenders who will base lending on the actual net figure on your payslip, others can erroneously assess income because of factors that only come to light when they look at the actual calculations” continues McBride. “Crucially, how the deductions and payments are actually marked on your payslip and bank transactions can make or break an application.”
With January of 2022 predicted to be the busiest ever month in terms of remortgage renewals, time is likely to be of the essence when considering mortgage options for Contractors over the coming months.
“Timing is key” concludes McBride. “Investigate your options without delay to make sure that any questions over renumeration method do not cause either declined applications or lengthy delays, as the switch to Standard Variable Rates for many is likely to be an expensive one.”