Self employed trying to buy a house

[w01313ly]

Hello. Apologies if this has been asked elsewhere or similar.

I started a business as a sole trader 2 years ago but continued my day job.
2020/21 I made £78,000 self employed and £22,000 employed
2021/22 I've made £62,000 self employed and £51,000 employed.

Me and my wife are having a baby and want to move house. I need my self employed accounts to show my income to be as much as possible for the mortgage borrowing quote but don't want to be hit by additional tax by earning over £100,000 (by losing the personal allowance I'm told). I've thought of doing a pension contribution this year which I believe can lower my tax amount but still keep my self employed wage high? Is this something that sounds sensible?

Thank you so much in advance.

 

[Paul Norman]

I guess the first question is this. Well, two questions.

1. Is the self employed income profit, or sales.

2. Have you considered employing an accountant. These are decent earnings levels, and it is likely that a decent accountant could make your life much easier.

 

[w01313ly]

The self employed is profit only. I do consultancy work so basically have no expenses save internet which is minimal. I'm in the process of getting an accountant now as I do agree everything is getting rather complicated.

 

[Financial-Modeller]

In addition to the excellent advice to engage an accountant, talk to a decent mortgage broker who may well be able to help you to navigate what matters to the mortgage lenders most likely to meet your borrowing needs, and what doesn't.

Perhaps @tony84 could help you?

 

[Paul Norman]

In addition to the excellent advice to engage an accountant, talk to a decent mortgage broker who may well be able to help you to navigate what matters to the mortgage lenders most likely to meet your borrowing needs, and what doesn't.

Perhaps @tony84 could help you?

Yes. Definitely this.

You may find there is less conflict between the two aims than you expect.

 

[NicoJ]

You need an IFA if you are going down the pension route, although an accountant may suggest a pension contribution to reduce tax they usually can't give financial advice (i.e. where best to invest etc).

Also, you need to pay any pension contribution before 5th April 2022 for it to impact your tax for the current year. As we are on 10th March you need to look at it ASAP.

 

[tony84]

Not for now, but have you thought about going limited? You can then take money out of the business as and when you like.

I am not sure if the pension contribution will affect your income. I would assume it comes out as an expense, so will in effect drop your income.

Most lenders would work of an average of your last 2 years accounts, some will work off the latest only but as there has been a drop anyway it would be the £62k lenders work off. So your income would go down as £113k (£62k + £51k).

 

[Adam93]

Not for now, but have you thought about going limited? You can then take money out of the business as and when you like.

I am not sure if the pension contribution will affect your income. I would assume it comes out as an expense, so will in effect drop your income.

Most lenders would work of an average of your last 2 years accounts, some will work off the latest only but as there has been a drop anyway it would be the £62k lenders work off. So your income would go down as £113k (£62k + £51k).

Pension contributions are not an expense for a sole trader. They increase the tax bands and the point at which personal allowance is abated, so it will achieve what the OP desires. The real question would be whether the lender would deduct the pension contributions when calculating affordability which is a question for a mortgage broker.

 

[paulears]

The only conflict is you do your accounts to be as tax efficient as possible which usually reduces your effective earnings on paper. For a mortgage you need as much income as you can show and for tax the least. My accountant was horrified when I paid my mortgage off - now I am a low income earner who seems to have lots of liabilities and my credit worthiness is down the pan. It doesn't matter for me, as I have very low outgoings and a decent standard of living, but that looks really bad on paper. No mortgage, credit cards paid off at the end of the month - I'm a terrible risk!