Lenders can use quite different criteria to verify your income and assess affordability, and this will also vary depending on whether you are self-employed as a sole trader or partner, operate a limited company, or work via an umbrella company.
Many lenders assess contractor income in the same way as for self-employed applicants, by asking for full business accounts prepared or certified by a chartered accountant. Lenders vary in how many years’ accounts they will ask to see but be prepared to submit accounts for up to the previous three tax years.
Some lenders may ask for SA302 year-end tax calculations (with corresponding tax year overviews), either in addition to or instead of full accounts. Depending on how you submit your tax return, these can be printed from the online Self-Assessment portal, via your accounting software, or requested directly from HM Revenue & Customs. Be aware that while many lenders accept SA302’s printed at home or by an accountant, others will ask for HMRC originals.
If you run your IT contracting business as a limited company, lenders will typically use only income and dividends drawn from the company in calculating your income for affordability purposes. However, some more specialist lenders may base their calculations on your share of net profits; this can potentially make a considerable difference in how much you will be able to borrow.
Some lenders calculate contractor income by taking the day rate from your current contract, multiplying it by five to give a weekly income, then multiplying by 48 weeks to give an annual income (considering holidays periods). They will then use this figure against their usual affordability calculation to work out how much you can borrow, typically four or five times the annual income figure.