In this section we will cover how self employed income is assessed by lenders such as banks and building societies. If you would like to understand how much you could potentially borrow please check out the dedicated page here. Likewise if you would like to understand what documents are required to evidence income, again please check out the dedicated page here.
Let’s run through how the main types of self employed income are assessed by lenders:
Typically if you own 20% or more of the shares in a company (percentage may vary depending on lender), the income to be considered will be your salary plus either dividends received or your share of the net profits.
Example – Assume you own 50% of Company ABC. The company makes a net profit of £60,000. You pay yourself a salary of £10,000 and draw £20,000 in dividends. A lender who works on an income received basis would lend based on a figure of £30,000 (salary plus dividends). A lender who works on a net profit basis however would lend based on a figure of £40,000 (salary plus share of net profits), meaning you could potentially borrow a larger amount.
As a sole trader, your income will be assessed as per the figures you provide to HMRC. The document that confirms your income numbers and which is usually requested by lenders is known as a SA302 form. The figure used from the form is usually the “Total Income Received” amount.
Similar to a sole trader, the figure used by lenders will be as per the SA302 form submitted to HMRC.
Arguably this is the form of employment where it’s most difficult to confirm exactly how lenders will assess your income. The reason being that there are so many variables. A contractor could be employed, a sole trader, a limited company or working under an umbrella company. In addition to this the contract could be for days, weeks, months or even years. It could be that your income is assessed as per a limited company director or a sole trader. Alternatively some lenders may work off your day rate or the terms of the contract.