Fiscal drag and the income tax trap

Many business owners deliberately keep the income they draw to a set level. Just under the point where higher rate tax kicks in. Below the marks where personal allowances start to taper or childcare support is affected. That is often a sensible plan, and it is a decision for you and your accountant. I am not a tax adviser and I would never tell you to change how you are paid.

But there is a knock on effect that rarely gets mentioned, and it lands squarely on your mortgage.

When a lender looks only at the income you draw, a carefully managed tax position can look like a modest salary. The mortgage on offer shrinks to match it. You can end up assessed as if you earn far less than your business actually makes.

Here is the part worth knowing. The money did not disappear. It is sitting in the company as profit. And a number of lenders will consider your share of that company profit, not only what you take out personally.

That single difference can change the size of mortgage available, sometimes significantly. It is stronger again where the business is growing, because some lenders will look at your latest year of profit on its own rather than averaging it down against leaner earlier years.

So you may be in a position where you keep following your accountant's advice to the letter, change nothing about your tax, and still access a larger mortgage, simply because the case is presented on the full picture rather than the slice you draw.

Let me be clear on the boundaries. Keep taking proper tax advice. The thresholds and their effects on allowances and childcare are a matter for your accountant, and they move over time. My job is the mortgage side. Once your income is structured the way you and your accountant want, I look at which lenders can read the whole picture and assess you fairly on it.

If you have kept your drawings deliberately low and assumed that caps your borrowing too, it may not. That is the whole point of this piece. If it sounds like you, send me a message and we can talk it through.

YOUR HOME IS AT RISK IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER LOAN SECURED UPON IT.