14 Jun 2021

Get a mortgage as an umbrella contractor inside IR35


Getting a mortgage as an umbrella contractor

The way contractors are treated has evolved over the past year due to changing IR35 intermediary tax legislation.

The changes mean more self-employed people are counted as employees and therefore have to abide by the same tax rules as permanent staff – as the government looks to crack down on tax avoidance.

Under the terms of IR35 it’s now down to private employers whether they see these employees as contractors or not.

As a result, more contractors are paid by umbrella companies, effectively payroll solutions that manage tax contributions on behalf of the employee.

These payroll solutions can make it easier for the individuals by taking out some of the hassle, but those affected may end up paying more tax than before.

From net to gross – mortgage affordability

When working through an umbrella company people are paid on a net basis, meaning income taxes and National Insurance contributions are automatically deducted.

This marks a change for some contractors, who are used to being paid on a gross basis, before managing their tax contributions themselves.

However, when applying for a mortgage this switch from income being calculated on a gross to net basis shouldn’t be cause for too much concern.

While the income numbers may be lower, when calculating mortgage affordability lenders will still look at the gross income, just as they always did.

In sum, just because you’re paid on a net basis doesn’t mean you can’t afford to get a mortgage.

Getting a mortgage

The umbrella company will generally allocate you with a payslip, which lenders can use to calculate your mortgage affordability.

Lenders will usually ask for three or four payslips and bank statements, in a similar way to an employed person.

If you have a contract signed with an employer via this umbrella company, this will also be requested.

Some lenders are more open to accepting term contractors than others, while some will scrutinise whether you have a shorter or longer-term contract when deciding whether to lend to you.

Downsides of Umbrella companies

When operating via Umbrella companies you are treated as an individual, which means you can’t utilise the normal advantages of operating as a limited company, such as building up funds in a company or taking out a tax-free dividend.

Some Umbrella companies also pay you in unusual ways, which can make getting a mortgage more complicated.

While some pay you a regular salary, others work by paying a very basic salary plus a large amount of commission.

While this commission-based model won’t put off lenders entirely, they will likely only take a portion of this income into account when calculating whether you can afford a mortgage.

We can help

We understand that these changing rules can feel like a minefield for some contractors, who are used to operating as a limited liability company.

If you’re worried about getting a mortgage after the IR35 changes, we are here to help, whether you are inside or outside IR35.

We know the ins and outs of how these changes affect your mortgage eligibility, while we don’t charge a consultation fee when taking on cases.

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