Let face it getting a mortgage as a permanent employee is a lot easier than getting a mortgage either as self-employed or a director of a limited company. The main reason for this is because showing proof of income is a matter of just producing payslip for most employees. The same can’t be said for the self-employed.

This is why some consider getting mortgages as a self-employed may appear difficult as depending on what the mortgage lender are requiring as proof of income, your income could vary.

As accountants we are often asked to get involved in the mortgage applications process for our clients by providing the various documents and figures necessary for proof of income. These are the item we are most often asked for:

SA302

The SA302 is simply a statement of the income you have declared in your self-assessment tax returns.

Pros of SA302

1. Business year and tax year are the same. The SA302 serve well for sole tradres as the business and the individual running it are usually the same entity. This also means that the business year is the same as the tax year which means declaration of income will be the same regardless of what periods you are searching.

Cons of SA302

1. Company directors taking small salaries. A lot of mortgage lenders tend to only base proof of income on your salary. So, If you are taking advantage of the personal allowance threshold (£11k), then you are not going to be able to buy much with that.
2. Year end timing difference. Usually your company year-end accounts does not fall in the same periods as your self assessment tax returns period. This means that in the 12 months you have prepared self assessment tax returns, you may not have prepared your company tax returns, which means any dividends declared would not reflect in your self assessment tax returns. Therefore, it will also not reflect in your SA302.
3. Company directors with retained income. If you keep the profit in the business (retained earnings) instead of taking it out in the form of a dividend then this will not reflect in your SA302. Even though you know and I know that the retained earnings is yours (especially if you are a one director limited company), it will not show in your SA302.
4. Low taxable income. I you have tried to reduce your taxes by claiming all possible expenses and capital allowance then the knock on effect may be that your income from the SA302 may not accurately reflect what you have been able to take from the company via drawings. You might feel that you have more income then your SA302 actually shows.
5. Losses brought forward. If you are self employed and have previous year losses they are automatically used up against the next year’s profit. The SA302 shows the final taxable income, not the profit for the year. If you made a good profit but used previous year losses against all of it, the SA302 will show income as zero.

Tax Year overview

This is a new(ish) development to be used in conjunction with the SA302, ideally to make the mortgage process easier.

The Tax year overview confirms the tax due from the self assessment return submitted to HMRC and shows any payments made, cross referencing with the Tax Calculation (SA302). Like the SA302 relates to your personal tax return, not your limited company tax return.

Limited Company accounts

If you are a director of a limited company you may be asked to provide past limited company accounts as part of the proof of income. Generally these are the accounts that have already been submitted to Companies House, although you will probably provide the full version, rather than the Companies House abbreviated version.

Very occasionally, if the business hasn’t been going long or there has been significant growth or change since the last submitted year end, you may be asked to provide part-year figures. However since these are not “official” yet they will carry less weight.

Accountant’s certificate

This is where we most often get involved. Many mortgage lenders will ask for an accountant to fill in their specific form which certifies the client’s income. They are most often used for company directors and serve to “prove” the company accounts or other information provided.

Each lender might ask for slightly different information which commonly includes:

Salary income
Dividend income
Company profit

There is also variation in the number of years worth of information that lenders ask for.

Issues or delays can arise when the information on the accountant’s certificate conflicts with the information in the mortgage application because slightly different criteria or dates have been applied. When the mortgage application is completed it is not always clear what the income figure should be based on as there are so many potential variations.

Accountant’s certificate tends to be used when the SA302 and tax overview information is not really representative of the income, in particular when there is a large element of dividend income and there are timing differences or if profit has been retained within a limited company rather than taken out as dividends.

Summary

Although HMRC and the Council of Mortgage Lenders have been attempting to simplify the mortgage application process for self employed it is still a bit of a minefield. Despite their efforts there is still no consensus on what lenders will ask for. Depending on your particular circumstances some combinations will be more advantageous for you than others. As accountants we do get asked by our clients to provide many different combinations of information depending on the different lenders. The main thing is to have a flexible attitude as you may not get that great mortgage rate you’ve set your heart on if the lender’s requirements aren’t compatible with your particular income circumstances.

In addition, the decisions that are made to reduce the tax due often work against you when you come to apply for a mortgage. This is one area of your life-business overlap where forward planning is really, really important. If you think that you might want to apply for a mortgage in the next few years it is definitely something to discuss with your accountant before your accounts and tax return are submitted as it may make a difference to how certain items are treated.

Finally, good luck