Top 5 - Self Employed Tips

Hi, guys, I'm Dan, this is Kye here again from Crescent Mortgages, and today we're going to be giving you our top five tips for the self-employed. Now we do know that there are a lot of self-employed people.

They do find obtaining a mortgage a very, very frustrating subject. They feel that it's much more difficult for them than it is for an employed person. And in some ways, that might be correct. But actually, if you're getting the right advice and you know what you're doing, it's very, very achievable.

This will be a good one Dan, I think. Number one, a lender will not just look at your last couple of payslips like they for an employed person, so this is where it can be a bit more difficult. So if you're self-employed, you have to show a track record of the success and profits of the business over the last couple

of years. Now, if you have two years full accounts or two years full tax returns, most lenders will be able to accept that a couple of lenders might need three. But on the whole, if you have to, you should be fine.

Now they will usually look an average of the last two years if the profits have increased, if the profits have reduced. They'll usually just look at the most recent year. There are some lenders that can just look at the most recent year without taking an average total.

But most lenders will take an average. Yeah, I think that's pretty well summarized. I think the only other thing I would add is occasionally lenders can take just one year's books, but very limited, in that scenario. Those are certainly worth picking up the phone or dropping us or somebody a message to check first.

Number two, affordability will not be assessed using your turnover, so they will look at your turnover minus any expenses and then look at your profits, and then they'll start to look at how much they can use for affordability.

So we do have this conversation with a lot of self-employed people who maybe took £50,000 in the year. However, they offset £10,000 of expenses, leaving a final profit of £40,000. So the lender is not going to use the 50,000.

They're going to use a maximum of the £40,000 profit after expenses. We understand that you may feel that if your accountant just told you to offset those expenses to reduce your tax bill. But as far as the mortgage goes that they are not going to use the turnover, they will reduce that figure with the expenses that

you've declared. Number three, if you own more than around 20 to 25% of a company, the bank or building society is going to class you as self-employed, which means that they are then going to be looking at your previous couple of years tax returns or accounts, rather than just your last couple of payslips.

Yeah, it doesn't matter if your PAYE. You get monthly pay slips, you take a salary. Your shareholding is the key for most lenders when assessing limited companies. 20 to 25 is quite a common spot for a lot of lenders.

It can go a little bit lower. But ultimately the shareholding and completely dictate how the lender assesses you. And we should highlight as well that we do have this conversation very, very frequently with clients who are adamant that they're employed.

They tell us they're employeed, they send us the payslips. They don't tell us that they have a 50% shareholding in a company, and it's only further down the line when when us or the bank discover that actually you do have the shareholding.

But then unfortunately, the mortgage may be declined because it was submitted in the wrong way. So you have to make it very clear to your broker or your bank that you do have a shareholding in the business, and then they will confirm whether they're going to assess you as employed or self-employed.

But again, generally over 20 to 25%, you will be classed as self-employed and they will see that that track record of accountants or tax returns. Number four, the document requirements will vary depending on your type of self-employment, so the two most common are you're either a sole trader or a director or shareholder of a limited company.

If you're a sole trader they're generally going to take the documents from your HMRC tax returns, which HMRC will provide to you once you've submitted these confirming what your profits are. If you're running a limited company, they can ask for a bit more.

They may still ask for the HMRC documents as well as your full annual accounts because they want to check the performance of the business to make sure that you're not taking out more money than the business is actually producing.

Yeah, and on a limited company, a lender will be looking at the salary dividends generally that you've taken out the business, and often that's why they're looking for the accounts. Some lenders they will take a combination of the salary and the profit, namely the net profit, although occasionally there is gross profit.

So it does vary them to companies, which is often why you get the accounts alongside any tax calculation. Gross profit is your profit after expenses before corporation tax, your net profit is your profit after corporation tax. Most, as Kye just mentioned, will take your profit, your net profit after corporation tax, with a couple of lenders that will take

the gross profit before corporation tax, which obviously you'll have to pay as a limited company director. That's often one of the few benefits, I suppose, isn't it? Mm-Hmm. *Giggling*

Point number five, the tax returns or full accounts that we've just mentioned normally needs to be dated within the last 18 months for the lender to accept them.

So for example, we're now in October 2021. So if you submitted your tax returns for the fifth of April 2020, if they the most recent ones that you have, they are now just over 18 months old, which means that most lenders will not accept them.

So you'll struggle to obtain a mortgage until you've done your April 2021 tax returns. Now, we are aware that you actually legally don't have to do your 2021 tax returns until, I think, January of next year. And we do have this conversation frequently with clients.

So as far as what you have to do, that's fine they don't need be done yet. But for achieving a mortgage at this point, 18 months later, you will have had to have done the 2021 tax returns because as far as the lenders are concerned, if you've only got your 2020 figures, that's over 18 months since that year finished

. So they've got no idea of what your business is like in the last 18 months since since then. Yeah, I think generally, elaborating on that point slightly, having your documents in order is key and the accounts or tax calculations returns that those documents being in date ideally having the last two years, three years, if you can, as

we've mentioned before, having those in order or near you, when you talk to your broker, your bank will make that conversation much more seamless than trying to guess or project, which becomes much more difficult, makes life easy for us.

Makes life easy for you. Everyone's a winner.

I love you so much. OK, guys, so we hope you enjoyed our top five tips for the self-employed, again, quite basic stuff. So you know, there is a lot more to think about which which will depend on your circumstances.

Any questions? Let us know and hopefully we can help you find the right mortgage.