Can I get a mortgage as a contractor under IR35?

The new IR 35 rules

New IR35 rules came into force early in April 2021 after being delayed by a year due to the COVID-19 pandemic. The government introduced the updated legislation to make it harder for contractors to avoid paying required income tax and National Insurance contributions. The update aims to shut a loophole under which individuals effectively worked full-time for a company but ‘disguised’ themselves as a contractor to take advantage of beneficial tax rules. This had regularly been the case, according to HMRC.

The updated regulation applies to contractors who render services to medium and large businesses in the UK through an intermediary. The ‘intermediary’ generally refers to a personal service company, but it can also be a limited company or other entities such as a partnership.

Under the new rules, which came into force on April 6th, 2021, medium and large companies in the private sector will manage the status of individuals they work with regularly. In other words, it’s now the company that chooses if the person they are working with on a contractor basis is a full-time employee or a ‘genuine’ contractor. Companies in the public sector were already bound by updated IR35 rules, which were introduced back in 2017.

A quick overview: what’s changed under new IR35 rules

Before the government enforced the updated legislation, contractors working for private sector clients used to be responsible for working out whether they fell inside the scope of IR35. HMRC was concerned that many contractors were essentially working for a business on a long-term and full-time basis but opted to be paid through an intermediary, i.e., their personal service company, as a contractor. That’s now changed. Today, medium and large companies are responsible for deciding the contractor’s employment status.

The rules generally apply to companies with a yearly turnover of £10.2 million and above, have a balance sheet of above £5.1 million or employ 50 employees or more. Under this threshold, a business is generally understood to be a small business, and the rules do not apply. However, all companies still need to ensure they are compliant and engaging contractors correctly regarding legal obligations.

Why was it so beneficial to be a contractor before the new IR35 rules were updated?

The updates to IR35 were implemented because HMRC became concerned that many contractors were exploiting a loophole in order to pay less tax. Contractors paid themselves a limited salary through their intermediary (much less than the company they were working for was paying them), to reduce income tax and National Insurance payments. Later, they were paying themselves dividends from their own intermediary company. These dividends were taxed at a lower rate, meaning that overall, contractors were paying less income tax and national insurance contributions than might otherwise have been the case.

Another tactic contractors sometimes used was to work for a prolonged period for the same company as a contractor even though they were effectively employees. Contractors would have a contract in place that effectively finished every Friday evening, only to start again on Monday morning with a new contract. In this case, the contractor should have been paying about the same amount of tax that a full-time employee was, but being paid into a personal service company, the contractor could, again, pay less tax.

None of this was illegal, but it all fell into a grey area. HMRC wanted to make the rules clearer regarding what’s expected from contractors and the businesses they work with and what taxes need to be paid.

Mortgages for contractors in IR35

Firstly, IR 35 is nothing new as it’s been around for the public sector for a while. You don’t need to worry about lenders struggling to navigate new legislation or not lending at all while they get to grips with the new rules.

The new IR35 rules have been widely debated and sometimes criticised. There’s also been quite a lot of concern about how the legislation will affect private sector contractors and their income.

It’s early days, but things are looking positive from a contractor mortgage perspective. If you have a reasonable day rate, steady income from your intermediary company and can demonstrate a solid financial background, getting a good mortgage for the amount you want is unlikely to be an issue, even if you fall under IR35.

You will likely find that it is more challenging to navigate lenders alone, however. Working with a mortgage broker who can help you find the best lenders for your situation will undoubtedly be helpful. The new rules make things a little more tricky and having someone help you find the best mortgage and the best lender will make things a lot easier for you. You’ll also be able to rest assured that you’ve secured the best rates, as your mortgage broker will know which lenders will give you the best deals.

IR35 hasn’t changed lenders appetite to give contractors mortgages

We’ll start by telling you this: lenders still want to lend! Regulations and legislation change all the time, and the IR35 rules are just one more point of attention for lenders. If you are considered inside IR35, don’t assume that lenders will only offer you a small mortgage calculated on your income – that will most likely not be the case. If you fall into the scope of IR35, you may have some additional hoops to jump through to secure a mortgage, but there are lots of lenders who will gladly let you borrow.

If you do fall inside IR35 rules, though, securing a mortgage can potentially mean more paperwork or more complex evaluations. It’s here that you’re likely to benefit from a mortgage broker.

How will a mortgage lender assess you if you fall under IR35?

What is always most important to a lender is that you can afford your mortgage, and you won’t default on payments. This will remain the case, whether you fall in or out of the scope of IR35. If you fall under IR35, lenders will evaluate your financial situation in that light. Rather than using your income (which might give you a lower mortgage), a lender will likely be able to use your day rate as a basis. Some lenders may have different approaches to working out what you can afford, but we expect that these will be largely beneficial, rather than aiming to penalise you.

It’s also important to know upfront how the changes to IR35 will affect your outgoings. It’s possible that if you fall under the new rules now but didn’t before, you’ll need to pay more income tax and National Insurance payments. Making sure you know (roughly) what you will need to pay in tax will be necessary for ensuring you can afford your mortgage repayments and that you are comfortably able to meet your other financial obligations.

If you fall under IR35 and want a mortgage, how can a mortgage broker help?

IR35 is likely to make the evaluation and application process for your mortgage more complicated. Going it alone and approaching lenders directly may be pretty challenging and complex. Every lender will evaluate you differently. A mortgage broker will be familiar with the market will know which lenders are most likely to be the best fit for your situation. This alone will help you save time and stress.

A mortgage broker will also help you with your application. Brokers understand what a lender wants to see or what will need more explanation in your application. Your mortgage broker will present your application in the best way, showing you where you might need to provide additional paperwork, documentation or proof to make the lender happy. 

Some lenders are already well set up to lend to contractors that fall under IR35 rules. Other lenders aren’t. A mortgage broker like London FS, with access to lots of different lenders, will help make the application process easy and help you get the best mortgage. We will avoid the lenders that aren’t well prepared and go straight to the lenders that are.

You’re likely to find that a mortgage broker with experience and knowledge of the market will help you cut through some of the complexity and get things moving quickly. Rather than you trying to understand which lenders will give you the best mortgage, your mortgage lender will know upfront which lenders to go to and what they are likely to offer you.

Many people fall into the scope of IR35, and lots of them can secure the mortgage that they want. Don’t let stories of IR35 complexity scare you – you will be able to find a suitable residential mortgage option.

If you are a contractor and are thinking about buying a property, we’d love to share our insights and chat about your options. Get in touch via email or give one of our brokers a call directly on +44(0)2084275057.


 Nothing contained within this communication should be construed as advice. Please seek individual professional advice relating to your personal circumstances.