From Friday 9 July 2021, we are making some changes to our requirements for affordability and when verifying income for contractors on an employed basis.

Where a customer’s income comes from a contract and they are not employed on a permanent basis they are classed as a contractor. This will include individuals who are self-employed and pay their own tax, those who are employed via an umbrella company who deduct their tax and people who are essentially employed but on a fixed / short term contract e.g. 12 months.

Contractors can be treated as self-employed or employed for income verification purposes and the following is not changing:

Self-employed

We will treat the customer as self-employed if:

  • They pay their own tax, OR
  • They have more than one contract, OR
  • They have set up a limited company and employs other contractors.

Income verification is as standard for self-employed customers.

Employed

We will treat the customer as employed if:

  • Tax is paid by the company they work for (or they are employed via an umbrella company who deduct tax), OR
  • The customer is a contractor who earns more than £500 per day or £75k per annum, OR is an IT contractor on any income. These contractors can be treated as employed irrespective if the customer pays their own tax, or classes themselves as self-employed. (The only exception to this is where a customer has more than one contract or they have set up a limited company and employs other contractors, in which case they should be treated as self-employed).

Additionally, to be treated as employed the following still applies:

The customer must have either:

  • 12 months or more continuous employment, with six months of the contract remaining, OR
  • Two years continuous service (for the last two years as at the date of application) in the same type of employment.

When we are treating a contractor as employed for income verification, we have made some changes to our requirements:

Contractor who pays own tax, or it is deducted by umbrella company (including IR35)

  • Copy of latest contract and latest payslip will be required (or where payslips not issued the latest bank statement)
  • Income to be used is the lower of the gross value of the contract or income calculated from the payslip / bank statement
  • Gross value of contract is calculated at the daily rate on the contract x 5 days per week x 46 weeks per year (or hourly rate x 7 hours per day x 5 days per week x 46 weeks per year). Unless the contract states the actual hours/days worked are lower in which case use these figures
  • Income from payslip / bank statement is to be calculated by multiplying the gross pay received to give an annual figure and then calculating the income based on a 46 week year to correspond with the calculation from the contract (unless the contract states the actual weeks to be worked is lower in which case use these figures) e.g. multiply gross pay on a monthly payslip x 12, divide by 52 weeks and multiply by 46 (or multiply the gross pay on a weekly payslip x 46)
  • The total gross pay showing on umbrella payslips may be broken down by basic salary, commission, ‘additional taxable income’, holiday pay etc. but as long as the contract confirms the contractor is paid via a daily rate, or hourly rate, the income does not need to be split into these separate elements and can all be keyed as basic salary
  • The lower of the two figures calculated should be keyed as income and used for affordability.

Fixed / Short Term or Agency: tax is deducted by employer (not including IR35)

  • The latest payslip must be used to evidence income, or latest three payslips where other income is being used
  • Income from the payslip is to be calculated by multiplying the gross pay received to give an annual figure and then calculating the income based on a 46 week year e.g. multiply gross pay on a monthly payslip x 12, divide by 52 weeks and multiply by 46 (or multiply the gross pay on a weekly payslip x 46).

Members of Construction Industry (CIS)

  • The latest three months payslips and corresponding bank statements must be used to evidence income, and an average used
  • The average amount is then to be used to calculate the income based on a 46 week year e.g. multiply average monthly figure using latest 3 payslips x 12, divide by 52 weeks and multiply by 46.

There are no changes to how we treat customers on a Zero Hours Contract.

We have updated our requirements to reflect the new government tax legislation changes (IR35) and to take into account that payslips issued by the main umbrella companies are broken down into different income types.

The new criteria will apply to all full applications submitted from Friday 9 July 2021. A Decision In Principle (DIP) keyed before this date then submitted as a full application from Friday 9 July 2021, will be subject to the new criteria. The new criteria will also apply to new further advance applications from this date.