buy-to-let

No one likes paying tax and anyone who is self-employed, or a controlling Director of their company, will always look to their Accountant to get the most out of their turnover while paying the least amount in tax at the year end. Unfortunately this tax efficiency has a habit of biting you when you come around to looking for a mortgage.

So what income will lenders use?

If you are self-employed then it is your Net taxable income after your Accountant has deducted all of your business expenses from your annual turnover.

If you are a Director of a Ltd company chances are you are paid a basic salary of around £10-12K, so that you qualify for your basic state pension in retirement, while paying little national insurance. On top of that you take dividends on which the basic rate tax has already been collected, via the company, and only higher rate tax is payable if your dividend payments exceed the basic rate threshold*.

Both of the above are confirmed by supplying the last three years SA302’s, which your Accountant can order for you, as most lenders like to see a historic pattern. As a rule they average the last 2, but sometimes 3, years rather than taking the latest year. However, if the latest year is lower than the previous year they will only take the latest lowest figure. Only a few lenders look at just the latest year, which may be helpful, if you have had a surge in income drawn from the business.

A small handful of lenders don’t use SA302’s but prefer to look at the net profit of the business and your percentage shareholding in the business. This can be helpful for someone drawing around £40K+, to keep them in the basic rate tax bracket, but owning a company making net profits in the hundreds of thousands. In this case the lender can look to attribute the percentage entitlement of the profit to the Director when calculating mortgage affordability and so a larger loan could well be extracted in this case.

The Conclusion

So when you look to limit your tax, and have those year-end conversations with your Accountants, you might also want to consult your mortgage broker to check whether one piece of good news, a low tax bill, has an opposite piece of bad news in that it constrains your mortgage choice now, and in the future!

It always makes sense to take professional advice from a range of sources.

*although this is changing from April 2016: an additional 7.5% will be payable by individuals on all dividends received, after the first £5,000.
Thanks to Jeff Lermer and Associates, Barnet acting in an advisory capacity in producing this blog.