Note: Learn more about “What is IR35” in this blog article, which has been updated in June 2023, following recent discussions about discussions to changes to IR35 by the UK Government.
When applying for a mortgage, you will likely encounter a few hurdles. From your credit score to your employment history, many things are taken into consideration when lenders consider your application. But will IR35 be one of them?
In this post, ams: discuss IR35 and its effect on your mortgage application. If you need any further assistance do not hesitate to call one of our advisors on 0121 351 3710.
What is IR35?
IR35 is a term that refers to off-payroll working or self-employment rules. When exploring “What is IR35”, it is useful to delve into its history. The term ‘IR35’ was first used in a press release on the UK budget day of 1999, which introduced anti-avoidance tax legislation in the UK. The original press release is here and refers to Inland Revenue (IR) Press Release #35 of 1999.
The HMRC uses these IR35 rules to determine whether a contractor is genuinely self-employed or if they are really an employee. This is an important distinction for tax purposes, as self-employed contractors enjoy some tax efficiency, which means that they pay less in tax.
These contractors do not normally get traditional employee benefits, but along with lower tax requirements, they have greater flexibility and control over their work, making this an attractive option for some. For this reason, some contractors appear to be self-employed but would actually be an employee if they were not working through a limited company. IR35 rules are designed to clarify the situation.
Note: The IR35 off-payroll working rules apply on a contract-by-contract basis. Therefore, a worker may have some contracts that fall within the off-payroll working rules and others that do not.
What is inside IR35?
If your contract falls inside IR35, HMRC considers you an employee, and you will be expected to pay National Insurance and income tax like other employees. For further information about “what is IR35”, visit the HMRC IR35 page.
What is outside IR35?
If your freelancing contract is deemed to be outside IR35, you will be considered self-employed. This allows you to enjoy the tax efficiency benefits of self-employment but also deal with the associated risks.
Why were IR35 rules introduced?
The IR35 rules were introduced to combat fraudulent claims by contractors. Before these rules were put in place, many self-employed contractors worked as a limited company for a single client to avoid large tax and national insurance bills.
With the new legislation, if the terms of a self-employed contractor’s contract closely resemble that of an employee, they may need to become an employee of their client. This would mean that they now pay tax as an employee.
Can IR35 affect my mortgage application?
Determining whether your mortgage application will be affected by IR35 rules is tricky. Different lenders have different criteria, so one bank may accept your IR35 mortgage application while another rejects it.
Typical lender criteria
Some lenders’ updated lending criteria state that once a contractor reaches a certain point in their contracting career, they can be treated as an employee on PAYE (pay as you earn). To reach this point, the worker needs to meet a few requirements. These may include:
- To have either earned £500 per day/£75k-per-annum or be an IT Contractor, with any income
- To have, at the time of application, worked in the same line of work for at least two consecutive years
- To have been continuously employed for over 12 months, with at least six months remaining on their current contract
Other lenders state that IR35 does not affect your mortgage assessment, only the way you are taxed. For these lenders, you will be assessed the same way as before, depending on whether you operate through an umbrella company or a limited company.
In a nutshell, whether you fall in or out of IR35 it is important to get the right advice.
At ams: We have access to every lender and know their criteria like the back of our hand, so “If we can’t help, then it’s not possible.”
Current IR35 status
The UK government initially said in September 2022 that beginning on 6 April 2023, end-users would no longer be subject to the IR35 laws. On October 17, 2022, the new chancellor, Jeremy Hunt, changed his mind. Therefore, there are no present plans to alter the IR35 regulations.
Contact ams: today about IR35 mortgages
Are you looking for expert advice on “what is IR35” and its impact on your IR35 mortgage application? If you want to know more or are ready to apply for a mortgage, get in touch with us today. Contact us at 0121 4000 052 or visit our contact us page.