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Is getting Mortgage difficult for self-employed ?

Planning to transition from normal employment to self-employment. Concerned about mortgages.

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I'm in a permanent employment job that pays a base salary of £95K per annum and around £45K in stock-options though that varies according to stock prices. For purposes of Mortgage I suppose it's the fixed component that's considered, so for me that would be £95K pa. I'm getting offers for offshore clients (no UK presence) and they are willing to pay £120K and some stocks. Overall it's a good income - wouldn't say it'll make me an overnight millionaire but at-least wouldn't be classified as someone who lives cheque-to-cheque.

Since the companies/clients are not in the UK, they'll pay lumpsum monthly amount and I need to do my own taxes - so will be self-employed. I'm planning to go for registering a Private Limited Company and be the sole director + shareholder and withdraw a combination of salary+dividends. From what I worked out, the best possible scenario for me could be:

  1. NI secondary threshold = 737/month = £8844/annum. So I can withdraw say £8800 as salary into my personal account. No need to pay employee NI, no need to pay employer NI and still counts towards NI Contribution years.
  2. Pay Corporate tax from the Company account @19% on amount that remains (£111,156) after withdrawing the above salary. Profit remaining with the company after Corporate Tax = ~ £90K.
  3. Withdraw just enough dividends from the remaining balance in the Company account, to fall into the lowest Dividend tax slab of 7.5%. I still have 12.5K - 8800 unused tax-free allowance + £2K dividend tax free allowance = £5700. Dividend lowest tax slab is for dividends under ~ £37000. So if i withdraw 37000 + 5700 = £42700/annum as dividends then I only need to pay 7.5% on ~ £37K and no income tax.
  4. My net take-home is thus approx: £8844 + £5700 + .925*3700 = £48769/annum or £4064/month. This is enough for me to live by and pay rent/mortgage, bills and even save some. If I ever need to withdraw more I'll do so as dividends and pay more tax (32.5% dividend tax bracket I think).

A) Firstly does all that makes sense ? This is the 1st time I'll be heading for contract work (or a work as a non-employee).

B) Next, I'm planning to buy a house. My max budget is £350K, though I'm looking for something under £250K. I've £160K in my account and I'm willing to put a deposit of 100K (after which I'll still have ~60K left with me). This means I need to borrow between £150K-250K. Assuming all other conditions (credit scores etc.) remain same, are mortgage lenders suddenly less likely to lend me £150K-250K, now that I've become self-employed ? I still earn pretty well (or in-fact better) just that I'm deliberately not withdrawing too much fund from my own Private Ltd account to save on taxes, but after-all all that money is still mine as long as I own 100% of my company. Does that put off Mortgage Lenders ? There is nothing that stops me from borrowing and then leaving my permanent job and getting self-employed. Would you recommend this path instead ? I was planning to leave my current employer asap and to buy a house in next 4-6 months.

Replies (7)

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By RetiredTax
31st May 2021 22:13

I don't wish to sound rude but you are in receipt of £140k p.a. and, given the major changes you are planning and the varying strategies that might be possible, you really should seek informed professional advice and be prepared to pay for it, rather than rely on a site strictly set up for exchanges of ideas between Accountants, Taxation specialists etc.

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By lesley.barnes
31st May 2021 22:35

In your case a mortgage will be difficult to get. Mortgage providers ask for a minimum of two years accounts whether self employed or a limited company. Secondly what you are proposing is not self employment.

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Glenn Martin
By Glenn Martin
01st Jun 2021 00:26

You would need a mortgage guy who knows how self employed income works as not all are good at it. The next problem you will have is that your mortgage income is based on your filed SA returns so you will need at least a years trading under your belt, but only a few lenders will consider one years trading, so will likely need 2 years to get a good deal. So if you are looking to move house soon I would do it when I am still in employment as it will be far easier as it will likely take to 2 years to get a deal from now. They also consider 4.5 x your income so would be able to get £225k based on your income you suggest from the company.

As said above based on your earnings its worth paying a few quid to get some advice and set up correctly.

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By TSeeker
01st Jun 2021 02:23

Thanks all for taking time to answer !

RetiredTax wrote:

[..] site strictly set up for exchanges of ideas between Accountants, Taxation specialists etc.

Ah I didn't know that - got a link from another forum that this is a good place to ask questions on accounting etc., so bundled in the mortgage question too.

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By Hazel Accounts
01st Jun 2021 11:07

As other have said move house first! With a good mortgage broker the figures you state shouldn't cause a problem (some lenders look at available profits not just what you drew out) but they will want to see an established business before they lend - most ask for 3 years accounts, 2 is probably ok but less will be difficult............

Also recommend you hire an accountant - your strategy is broadly correct but there are other things to consider eg VAT, compliance issues with running payroll - some of which can carry large penalties if you get them wrong.

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Jennifer Adams
By Jennifer Adams
01st Jun 2021 11:26

Accountants arent mortgage brokers so make contact with one. Its getting increasingly hard for anyone to get a mortgage at the moment.

I spoke to a mortgage broker yesterday and its very hard for those who claimed any of the govts coronavirus initiatives (I know you havent but just so others are aware).

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By TSeeker
01st Jun 2021 16:13

Oh yes, will def. go with an accountant. I was just excited to learn about these for the 1st time so was curious. I'm a software dev, so did check on HMRC forum that serving the overseas client to create and maintain software products doesn't need VAT being charged. There are always finer points anyway so I take everything that I read online (combined with my comprehension of those articles) with some scepticism.

On the mortgage front, you all are right ! I talked to a bank's mortgage advice helpline and they basically said the same thing. Since COVID, I'll def. need at-least 2yrs to show that my business as a sole-trader or owner of pvt ltd is satisfactorily working. Also got to know that putting oneself in an Umbrella company (on its payrolls) will still count as being self-employed. So yeah, unfortunately need to stick to the current job and do all this and then move on - prob. going to take months now if not the entire year (the long term contract opportunity will likely go to someone else in the meantime) :(

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