I come across many self-employed people who collect money in cash, many of whom are very successful in their fields, be it builders, gardeners or makeup artists (not for me, although I can do with one). In a good wedding season makeup artists can make up to £5,000 a day which is definitely not a bad day’s work by anyone’s standard. But let’s say you even make £1,000 a day and it’s all cash every working day of the year, you would have racked up a whopping £261,000 (enough to buy a lovely house in Grantham or a nice little flat on the outskirts of London) however, this cash means nothing when you’re buying a property.
Firstly you should be paying your taxes anyway otherwise the taxman will eventually get you. Secondly, when it comes time to buy your flat/house you will have to explain where your money came from. You will first have to explain to your solicitor why you have £261,000 stashed away under your mattresses in old 20’s and 50 pound notes. Next, if you are getting a mortgage, your lender will definitely want to know how you accumulated this small fortune. They will also want to know that you will be able to pay your monthly mortgage payments going forward. With your monthly takings you should have no problems paying that mortgage, however it needs to be on the books to prove that you can pay it. That means either through payroll, dividends, benefits in kind or a mix of them all.
There’s a misconception generally that if you’re a higher rate taxpayer, then you would pay 40% of your entire income in tax, it doesn’t quite work like that. There’s a picture that went viral online recently which describes the UK income tax system quite well. I’ll attach it here and of course do your own research as the picture does not take into account dividends and NI etc. But still a very good visual for many.
Just to give you a brief idea about how much you would need to earn and have as a deposit I’ll give you an example of a £500,000 house. When buying a house like this to live in, you would need a residential mortgage where the bank (lenders) would typically ask you to put down at least 15% (lower deposits are available but usually with undesirable rates) which equates to £75,000. This means you will be borrowing £425,000 from the lenders, but for them to lend you this amount they want you to be earning somewhere between £85,000 per annum and £106,250 per annum (this depends on the lender’s criteria, generally it’s 4 or 5 times your salary). Therefore if you’re a highly paid self-employed person, you need to be able to display that you can earn this much and pay taxes to reflect this.
To buy a rental property, it doesn’t work quite the same way. It is favorable to have at least a 25k salary, however you still need to prove where your deposit came from. And generally lenders will ask for a minimum of 25% deposit however there are products available with less deposit (again with less desirable rates usually). If you become a professional landlord, then you may not even need a £25k salary. Anyway, before I digress on a tangent, get yourself a good mortgage broker who can advise you regarding the best products and rates on the market.
Nobody likes paying their taxes, who wouldn’t like to keep all the money they earn, but if you are looking to buy a house/flat then I would advise that you get yourself a good accountant and start paying your taxes (disclaimer: even if you’re not buying a house, you should still pay your taxes). A good accountant will find smart legal ways to pay as less tax as possible, while earning the most possible.
So to all my self employed readers out there, if you are looking to buy a house or a BTL property, get yourself a good accountant and pay your damn taxes, and start soon, as lenders can (not always) ask for your last 3 years accounts.
