IR35 changes: How will they affect self-employed mortgage applicants.
There's been a huge increase in the number of Brits who call themselves self-employed over the last decade.
An increase of over 50% between 2007 and 2018, in fact. In parts of the UK – particularly rural areas like Powys, in Wales – as many as one in four of us are now classed as self-employed.
Often, people have chosen to start their own businesses after struggling to find work after the global financial slowdown. But others – often contractors – discovered there were tax benefits to be had by being classed as a limited company, when in truth they only had one client: an employer by another name.
What is changing?
As it stands, many contractors operate a limited company with a single employee: themselves. The limited company bills the client, and pays its employee a wage. The limited company then pays corporation tax on its profits.
The wage may be a low figure that falls under the tax-free allowance, meaning the employee pays little or no income tax. They can then top up this low salary with dividends – lump sums of 'profit' from the limited company, paid to shareholders (i.e. the owner of the business – the contractor). These dividends have their own tax-free allowance; attract lower rates of tax above the allowance; and reduce the taxable profits of the limited company. It's a clever way of reducing your tax obligations, all within the letter of the law.
The Government is making changes to these tax rules, which will ensure these people are making the same tax and National Insurance contributions as employees.
The rule changes are (at the time of writing) due to come into force at the start of the new tax year in April, although the Federation for Small Businesses is lobbying for a delay to the changes.
Why is it changing?
There are several reasons for the change – including ensuring affected workers are receiving benefits like sick pay and holiday pay. But one of the primary aims is to increase tax revenue, with contractors likely to see a dent in their take-home pay as a result of increased deductions. Shib Mathew, chief executive of freelancing site YunoJuno, told ThisIsMoney.co.uk that "[if] IR35 applies, it could reduce a worker's net income by up to 25%."
Much has been written about how the changes may affect mortgage brokers themselves. But with so many applicants self-employed too, it may have a significant impact on brokers' business.
The impact on mortgage applicants
The implications are obvious: such a significant reduction in take-home pay would likely have an impact on affordability calculations. Not only that, but such a sudden and drastic reduction in wages may affect cashflow and lead to adverse credit events that will only complicate an application further.
According to reports, awareness among affected individuals may be low, so this is an opportunity to demonstrate your expertise and flag the issue to customers before they begin an application that, once rejected, could impact their credit file.
Many customers who were able to secure a mortgage previously may now find themselves trapped into their current deal, because their income is reduced when they're hoping to remortgage onto a new deal.
Responsible lenders may ask further questions of applicants who are applying as a limited company or are the director of such a company, to ensure future changes in income resulting from the changes to IR35 are captured; underwriting may therefore take longer.
Lending decisions are subject to an affordability/creditworthiness assessment.
Any property used as security, including your home, may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.