IR35: All IT contractors deemed “employed” under Halifax mortgage criteria; Plus Expert Application Tips For Contractors

Halifax has adjusted its affordability and income criteria for contractors who work on an employed basis to reflect changes to government tax legislation under IR35, Mortgage Solutions has reported.

Halifax’s amendments became effective from 9 July. Borrowers will be treated as self-employed by Halifax if they pay their own tax, they have more than one contract, or if they have set up a limited company that employs other contractors.  

In this instance, income verification will remain in line with the existing self-employed policy. 

• Halifax Borrowers will also be considered employed if they earn more than £500 a day or £75,000 per year
• They are also classed as employed if they are IT contractors on any income, regardless of the tax structure or if they consider themselves to be self-employed
• Halifax will deem clients as employed if tax is paid on their behalf by the company they work for or they are employed by an umbrella firm that deducts tax

The change in policy follows a recent ruling where an IT contractor working for Nationwide had to pay £74,523 in income tax and National Insurance Contributions after losing an appeal to be deemed self-employed, said the Mortgage Solutions report.

“The only exemptions for those earning more than £500 a day, £75,000 a year or IT contractors will be borrowers with more than one contract or those who have set up a limited company that employs other contractors.  

Customers will also be considered employed if they have 12 months or more continuous employment, with six months of the contract remaining. People who have two years of continuous services in the same type of employment will also be treated as employed, as per existing Halifax criteria,” said the report. 

How will Halifax verify contractor income?  

• Where a contractor is considered “employed” for income verification, this will need to be checked either with a copy of their latest contract and payslip, or bank statement if a payslip is not issued  

• The income will be calculated based on a 46-week year 

• The lowest figure of either the calculated gross value of the contract or income will be used for affordability 

• Those who work on a fixed or short-term contract or through an agency where tax is deducted by the employer who is not an IR35 umbrella firm will have to show their latest payslip to evidence income or last three payslips if other income is being used
• Members of the construction industry must provide the last three months’ payslips and corresponding bank statements, and an average will be calculated
• There will be no changes to income verification for borrowers on a zero hours contract

Virgin Money and Clydesdale Bank change contractor lending polices

Virgin Money and Clydesdale Bank, which are under the same banking group, have amended their policy for lending to contractors who have been placed inside IR35. Any banks that are part of the Virgin Money UK plc group, will offer specialist mortgages to contractors operating inside the legislation, according to Contractor Weekly.

Contractors must provide at least two months of payslips, which takes into account gross pay after the deductions of statutory employer costs and payroll service costs. 

How you present your income can make or break your mortgage application

If you want to learn how mortgage brokers that specialise in contractor mortgages present contractor income in such a way to underwriters that they have the best chances in getting access to lower rate high street mortgages, listen in to this webinar below from IPSE and CMME. Take notes.