01

How lenders assess self-employed income

Most high street lenders assess self-employed income using the average of the last two years net profit for sole traders. For limited company directors the standard approach is salary plus dividends drawn. A smaller number of specialist lenders use salary plus total company profit net of corporation tax — significantly more generous for directors who retain profits.

The income figure used is the net profit on the SA302 tax calculation not turnover. Lenders request SA302 tax calculations and tax year overviews from HMRC plus corresponding business accounts prepared by a qualified accountant.

02

One year of accounts — specialist lenders

With only one year of trading history the lender panel narrows significantly. Lenders who will consider one year of accounts include Halifax (case by case), Kensington, Aldermore, Precise and Together. Rates are typically 0.3 to 0.5% higher than standard products.

To maximise approval prospects: ensure accounts are prepared by a qualified accountant, ensure the SA302 matches the accounts precisely, provide evidence of forward order book or contracted income, and aim for a deposit of at least 25%. A clean credit record is essential.

03

The tax versus mortgage trade-off

The single biggest mistake self-employed mortgage applicants make is aggressively minimising taxable income then finding declared income is insufficient for the mortgage required.

If a mortgage is planned within 12 to 24 months discuss the trade-off with your accountant. Slightly higher declared profits for one or two years before application pays marginally more tax but enables a significantly higher mortgage and access to better rates. The additional tax cost is often a small fraction of the higher mortgage enabled.

04

Using a whole-of-market broker

Self-employed borrowers should always use a whole-of-market broker not go direct to a single lender. The self-employed mortgage market is fragmented with different lenders having very different criteria for income assessment, documentation requirements and acceptable business structures.

A specialist broker knows which lenders use salary plus dividends versus salary plus share of profit, which accept one year of accounts and which have the most flexible underwriting for complex income. Broker fees range from £500 to £1,500 — almost always excellent value given the rate and product access differential.

05

Document checklist

Prepare all documentation before approaching a broker or lender. Core documents: SA302 tax calculations and tax year overviews for the last two years from HMRC, business accounts prepared by a qualified accountant, proof of contracts or forward order book where available, and three months of business and personal bank statements.

For limited company directors additionally provide the most recent Companies House accounts and an accountant letter confirming your ownership stake and trading position. Having everything organised at the outset reduces time to mortgage offer by three to four weeks.