Freelance finance downsides

An incomplete list of freelance finance gotchas I’ve experienced in relation to parental leave and mortgage applications.

Obvious disclaimer: these all things I’ve heard about or directly experienced. Your mileage may vary.

Parental leave

• Sole trader dads are eligible for no paternity pay. At all. Zero.
• Sole trader mums on Maternity Allowance (MA) can only work 10 vaguely described “keeping in touch” days (where even 10 minutes of work counts as an entire “day”). This stings for exclusively self-employed mums because employees on Statutory Maternity Pay (SMP) who are also self-employed can do as much self-employed work as they want while on SMP
• If you’re employed and self-employed, you have to take the SMP, even if that is a tiny portion of your self-employed income and puts you in a worse financial position.

Mortgage calculations

When it comes to mortgage applications and the borrowing limits, self-employed people are penalised for income variability on all fronts.

For instance, if your income:

• Goes down in the last year of your application, lenders will use the lower of the two amounts for their calculation
• Increases over the last two years, they’ll average those two years

Self-employed people lose in both situations. You could have many years of stable income, reduce income in one year, then find your mortgage options are significantly limited.

PAYE

Many people who work for themselves take some on PAYE work, either out of choice or because the employer refuses to work with people on a self-employed basis.

Self-employed people often find themselves on a zero-hours contract with fluctuating PAYE income. For mortgage applications, this can be risky for lots of reasons:

• Any PAYE employment won’t be considered by lenders unless there’s a recent payslip, even if you have many years of proven income through P60s. If the work is seasonal and your application isn’t timed around a payslip, the income won’t be considered. This stings because this income would be considered – in spite of its ‘instability’ – if it was sole trader/company income.

• Lenders annualise your latest payslips to work out your PAYE salary. Of course, this could be a benefit if you happen to time an application around an increase in PAYE income. But if your PAYE goes down in the months leading up to your mortgage application (perhaps you’ve balanced it with an increase of self-employed work that lenders can’t see), your mortgage offer will be reduced.

• You’re at risk of being taxed immediately on single lump sum payments that would push you over the tax threshold when annualised. This is mainly a problem when receiving a one-off payment that isn’t representative of your earnings – some of this you won’t balance out until you submit your next self-assessment.