FAQ's

IR35 is a piece of tax legislation that was introduced in 2000 in an attempt to prevent ‘disguised employment’. In simple terms, IR35 rules are supposed to stop contractors who work through their own limited company from paying less tax, when their working arrangement reflects employment and they should be taxed as an employee.

If a contractor operates inside IR35, they are deemed ‘employed for tax reasons’, meaning they will be taxed at a similar rate to an employee in the same role. In the public sector, contractors working inside IR35 will have income tax and national insurance contributions taxed at source, by their client or agency.

In the private sector at least until April 2021, those working inside IR35 will be responsible for making an annual ‘deemed payment’ to HMRC, which includes the extra tax a contractor is required to pay when operating under IR35.

If a contractor works outside IR35, they are considered genuinely in business on their own account and can operate marginally more tax efficiently than they would when inside the rules.

Like any other limited company, contractors outside IR35 are free to pay themselves how they choose but typically do so through a salary that falls below the tax threshold and by drawing dividends. Outside IR35 contractors are required to pay corporation tax and income tax annually, in the way that the majority of small business owners do.

No, IR35 doesn’t apply to contractors working through an Umbrella company. This is because the worker is deemed an employee of the Umbrella and will be taxed as such. In the past, contractors could claim several expenses such as travel, mileage, and accommodation when operating through an Umbrella, but a recent change in the law means this no longer stands. While an Umbrella company does protect contractors from IR35, the significant cost of working through one are worth taking into account.

Many contractors take out Tax Enquiry Insurance for peace of mind in case HMRC decides to investigate their tax status. Generally speaking, IR35 insurance covers two important and potentially very expensive aspects – the cost of legal defence and the financial implications of being found inside IR35.

Business trips on your client’s behalf or travelling to a temporary place of work can be claimed as a business expense. If you use your own car then you could receive a mileage allowance, which is in line with the HMRC approved mileage rates:

Key Points

If you claim for business mileage, you will need to ensure that your motor insurance covers you for business use.

Any running costs, such as fuel, maintenance etc. of the vehicle is not allowable; the mileage rates are designed to cover these costs.

The cost of purchasing a bicycle and bicycle safety equipment qualifies for a tax exemption under the ‘Cycle to work’ scheme, provided that certain qualifying conditions are met. The bicycle must be mainly used for travelling between your home and your workplace or between one workplace and another. In this case, ‘mainly’ means that more than 50% of the time using the cycle and any safety equipment is for qualifying journeys. An additional form also needs to be signed in this case, confirming business and personal use.

If your mobile phone is in your limited company’s name then you can claim all line rental and call charges. Any further costs associated with this phone are also allowable, for example, mobile phone insurance or a hands-free/Bluetooth headset. All receipts must be retained.

The childcare that we advise our clients to claim is that of a direct arrangement between a third party childcare provider and your limited company.

The maximum value of childcare allowable is £55 per week (or £243 per month) depending on your payment cycle. This is the limit set by HMRC that is exempt from tax and National Insurance Contributions.

If anything above this were provided, you would be liable for tax and NIC on the additional amount.

The main requirements are that the childcare provider is registered or approved and that the child is:

A child or stepchild of the employee whose expense the child is maintained; or
Resident with the employee and for whom the employee has parental responsibility.

From ltd company contractors, small to growing companies, property investors, and sole traders, we offer a range of specialist accountancy services.

We won’t charge you to switch to QAccounting. Our in-house team will liaise with your previous accountant and gather all the information needed to transfer you swiftly and seamlessly. Should you need any accountancy work carried out from a previous year, a fee will apply for any retrospective work. If you’d rather chat to one of the team about this, please do not hesitate to get in touch with one of our advisers who will be able to help.

We only ask you to agree to an initial 3-month contract. While we hope you won’t want to, should you decide to leave us after 3 months, we only need 7 days’ notice and will not charge an exit fee. We understand that clients need to operate with as much flexibility as possible.

We have a range of different accountancy packages to suit our different types of clients, and additional services are also available on our ‘Schedule of Additional Fees’. There are no hidden costs – we’re completely transparent about our prices.

The way lenders work out your affordability is crucial to getting a competitive rate. Most High Street lenders work to a salary model. For contractors, this is of little to no use.

What you need is for a mortgage provider to understand your contract. Not only that but also how you keep drawings low for tax purposes. Now you can begin to see where it gets confusing.

You take home, in effect, a low salary. As such, you don’t fit their affordability criteria.

Lenders we deal with base their calculations on your contract rate, not net pay. They then project that rate to an annualised earnings total. This allows contractors to borrow a substantial amount more than High Street lending models.

The calculation to work out how much you can borrow is quite straight forward. First, find out how much you earn per week. That’s day rate multiplied by 5, assuming you work the accepted work week. If not, times your day rate by however many days you do work.

Once you have your weekly total, multiply that by 48, how many weeks you work each year. This will give you your annualised earnings total.

The lender will then use a factor of either 4.5 or 5 to determine how much you can borrow. So if a contractor’s day rate is £300, they can potentially borrow up to £360,000. Or at the lower 4.5 multiplier, £324,000.

This is a lot less complicated than you’d expect. High Street lenders can ask for two or three years’ accounts to verify what you earn. Contract-based mortgage underwriting is different. It only calls for a copy of your current contract as verification. You must also submit your CV and last three bank statements to back it up.

That you’re new to contracting will have no effect on your ability to secure a mortgage. Partner relationships with senior underwriters mean we can still get you a mortgage, even if it’s your first week.

That’s because:

A child or stepchild of the employee whose expense the child is maintained; or
Resident with the employee and for whom the employee has parental responsibility.
You’ll not get access to such service in the vast majority of High Street mortgage lenders.

We mean no disrespect to those advisers at your local branch’s front desk. But if they look at your take home and see that you’ve only a few weeks to run on your contract, they give up.

True, even contractor-friendly lenders like one month remaining on your contract. But if you have less than one month and your agency can express the likelihood of an extension, we have leverage.

If you’re in that position, speak to your agency or client. Most understand your predicament and may even offer you or negotiate a new contract to help your application.

That contractors need a bigger deposit than permies is a myth. Even with just a 5% deposit for a mortgage, we can secure competitive interest rates.

But that’s not to say you need to stop at 5%. The more you can put down, the lower your interest rates over the mortgage term. Or at least the introductory period, if applicable. But that’s the same for mortgages whether you’re in gainful or self-employment.

Most High Street lenders perceive contractors as self-employed, thus a potential higher risk. That is why they demand 2 or 3 years’ accounts as proof of income.

As a contractor, this ‘evidence’ doesn’t reflect your limited company tax efficiency. That’s when you need a specialist broker on side to highlight your affordability.

A mortgage adviser will talk to senior staff and help them see your true earnings potential. They then base their offer on an enlightened view of what you can afford. Using annualised contract earnings gives you access to much more in most cases.

Through a specialist broker, that you’re a self-employed contractor won’t have a negative impact on your interest rate. It will at least align with rates that lenders offer permanent employees.

As stated above, the more you put down, the lower the rate your deposit will secure you. But you can still get decent fixed rate mortgages with a 10% or 15% deposit.

If you’re a first time buyer you can get a 90% LTV mortgage at just 3.90% APR*, 2-yr fixed. A remortgage deal on 2-yr fixed at 85% LTV is even less, at 3.70% APR*.

*Rates are correct at time of print (Feb 2015). Your credit rating may affect the interest rates lenders offer.

The FCA banned self-cert mortgages in 2008. They’re not going to make a comeback any time in the foreseeable, either.

Believe it or not, contract-based underwriting was around even before the self-cert’s demise. But it was often easier for IFAs to ask contractors to self-certify their earnings. No one checked, advisers got paid and contractors were just glad to get a mortgage. Everyone was happy.

At least with self-cert gone, you can now get rates that reflect your earnings. Using your contract gives you far more options and better reflects your affordability, anyway. Some bemoan the passing of the self-cert mortgage; we’re not amongst that number.

You are more than welcome to do this.

But keep in mind that failed credit searches may impact your rating.  In our experience dealing with a mortgage adviser is beneficial because some lenders will not countenance contractors.

Yet they do not advertise this fact on the shop floor. You walk in, tell them you’re a contractor, they process your application. Great! What’s all the fuss about?

The problem is, they’re classing you as self-employed. They will ask for your accounts, accounts which show low drawings. They will use this figure to work out how much you can afford. They may even give you an agreement in principle. And that’s where it all falls down.

When that application gets to their underwriters, it will fail. They’ll take one look at your take home pay compared to the amount you want to borrow and reject it.

Understanding contracting gives an unparalleled advantage.  The mortgage advisers have already done – and continue to do – the leg work. Senior underwriters, trust them because they go to these lengths. As a result, they’ll assess your application on only the points that matter.

Even if you go direct to these same lenders, you cannot guarantee the same result. Advisers in branches are rarely trained to understand the way contractors work.

Their default mortgage process asks for two-to-three years’ accounts from the self-employed. They’re indifferent to the fact that you’re a contractor with high potential earnings.

If you’ve only just begun contracting, this is where your quest for a mortgage ends at the high street at least. Any hopes you had of getting a mortgage there, will go up in flames.

Do remember the effect that failed credit applications have on your history. You’re risking a black mark against your name that other lenders will see when you go to them. Even if they’re ‘contractor-friendly’, you don’t want to give them an excuse to find fault in your application.

Your first step is to secure an Agreement In Principle (AIP). This will give you more bargaining power in the market as it shows you’re serious. It is not, however, a firm mortgage offer. Don’t fall into this trap and don’t commit to anything until you have that firm offer.

The reason is because lenders unfamiliar with contracting offer AIPs based on your gross earnings. They don’t relate them to your accounts, but send your application to head office anyway.

Once that application gets to the underwriter, they reject it. Branch staff don’t understand how to package your application to show your true earnings potential. Again, this is why going through a specialist broker is so critical.

You must first complete a “Fact Find” questionnaire to enable the mortgage adviser to pre-assess your situation which will give them more information about the way you trade and your contract details. This includes a signed copy of your contract, bank statements and ID. This information is necessary to give your application its best chance of success.

But compared to other applications, there is very little information. A contractor mortgage application can complete within three to six weeks. Only if there’s a problem or build-up of applications will it take longer.

Now that you’ve grasped the basics of contractor mortgages, you’re going to want more. Especially if, like so many, you thought mortgages were beyond your reach.

There are plenty of ‘Contractor Mortgage Specialists’ in Google. Or so they claim.

The reality is that many companies you see are agents on commission. Most don’t understand contracting and freelancing. Even more, offer mortgages from lenders who don’t have bespoke policies for contractors.

But how do you tell the difference between affiliates and genuine brokers? It’s too difficult to tell from the scant information there.

Freelancer Financials will offer you free advice over the phone or you can fill in a form and ask them to call you when you’re ready. Talk about service!

See our guidance on the Criminal Finances Act 2017 here.