Can I Get A Mortgage Working Via An Umbrella Company?
Umbrella company mortgages can be complex and a good way to begin to answer this question is to pose some questions that a lender is likely to ask.
For example: Who employs you? Can you explain the route your income takes before it ends up in your bank account? Why do your payslips not look like an employee’s payslips? Why do the credits in your bank account have different names to the umbrella company?
The plot thickens, doesn’t it? The questions posed above are symptomatic of an application that is about to fail. It means the bank has failed to grasp that the borrower is a professional contractor utilising a payroll service as a tax efficiency vehicle.
What we need to understand is how we go about avoiding these questions in order to successfully obtain a mortgage offer.
Why Do You Need To Think About This Now?
Changes To IR35 In 2021:
IR35 as defined by HMRC means off-payroll working; ultimately, the legislation is designed to make sure workers are taxed fairly and to identify contractors and businesses which are avoiding paying the appropriate level of tax.
If you operate ‘Inside’ of IR35 you must pay the same tax as an employee, ‘outside’ of IR35 does not make you tax-exempt, however, you can pay yourself a salary and withdraw further income from dividends.
If you are considering getting a mortgage, now could be the ideal time to do so if you expect your income to decrease once you begin working within IR35.
Some Useful resources:
From Contractor to Umbrella Employee: What Does It Mean For Your Mortgage? | CMME
CMME’s Free Contractor Mortgage Guide
Progressing Your Mortgage Plans Amid Lockdown 3 | CMME
What’s The Difference Between a Contractor & an Umbrella Employee?
In essence, the work you do won’t be any different, no matter your role, but the way you’re taxed, paid, and the benefits you have might change.
This is important to account for when you’re thinking about your mortgage plans.
An Independent Contractor
An independent contractor is a contractor working solely for themselves meaning they are responsible for paying themselves a salary and completing a self-assessment tax return each year.
Many individuals choose to become independent contractors as it provides the freedom to work how and when they would like to, instead of in the confines outlined by a business.
In this mode of working, insurances, savings and securities must be organised by the individual.
An Umbrella Employee
An umbrella employee is a contractor working on temporary assignments or contracts employed by an umbrella company.
Joining an umbrella company can offer contractors some increased flexibility alongside the rights and benefits a permanent employee would typically receive like HR & tax calculations.
Many contractors choose to enlist the services of an umbrella company because of the relative ease that this provides when dealing with their pay and tax.
Much like a PAYE process, the administration required with an umbrella company is less time consuming than securing the services of an accountant, as the company’s tax experts will typically manage the contractor’s finances to make sure that pay is efficiently processed in a reasonable time frame.
| Consider | Independent Contractor/Ltd Company | Umbrella Employee |
| Your Status | You are the director of your own company. | You are an employee of the umbrella company. |
| Paying Taxes | You are responsible for ensuring your company and personal taxes are paid on time. | The umbrella company deducts taxes before you are paid. |
| Insurance | Your company needs to pay for business insurances (e.g. Professional Indemnity) | Insurance cover is typically included in umbrella fee. |
| Timesheets / Invoices | You invoice the agency for work done on behalf of your company. | You submit your timesheet to the umbrella. The umbrella invoices the agency. |
Ensure Your Application Is Assessed Correctly
The first step is to shift focus away from the invoicing mechanism, and onto the key points where the risk assessment should be focused.
These are:
- The gross contract earnings of the contractor
- The skills and experience of the contractor in their chosen profession.
If the underwriter can grasp these points and understand that the umbrella service is simply a means to an end, there should be no issue with a successful mortgage offer.
Easy, isn’t it? If you’re a contractor walking into a bank, no it isn’t! Banks have their prescribed ways of assessing income, and they will try to squeeze the umbrella contractor into the “employed” pigeon-hole.
Hence the request for payslips and a detailed breakdown of tax paid.
The fundamental answer lies in utilising a professional who can go to the right lender, and the right underwriter within that lender, to explain that contract value and experience should negate any perception of risk with an invoicing mechanism.
With current umbrella offerings for contractors, it can be complicated when a contractor tries to balance various factors that determine the right umbrella service to opt for. There’s IR35 compliance, tax efficiency, simple administration, regular payments, and even the acceptance of your end client with the umbrella you may want to use.
What can help in this decision is the knowledge that a competitive mortgage offer is still realistic.
Helpful Calculators Designed for You
CMME Can Help You Secure A Mortgage As An Umbrella Contractor
Contractor Mortgages Made Easy has worked hard to influence a number of lenders to rethink their lending criteria and become contractor-friendly. They continue this dialogue to further increase the number of mortgage options open to the contractor community.
Whether you want to talk specifics or are just after some general advice, CMME can help. Speak to us today on 01489 223 750 for a completely free, no-obligation mortgage consultation. Or click the button below.