Why Income Calculation Matters
When you're employed, calculating your income is simple: your salary is your salary. But self-employed income is fundamentally different. Your "income" could be calculated in multiple ways, and different lenders use different methods.
The impact can be significant
Understanding how lenders calculate your income helps you:
- Choose the right lender for your income structure
- Optimize your accounts before applying
- Set realistic expectations for borrowing
- Have informed conversations with brokers
Sole Traders
As a sole trader, your income for mortgage purposes is typically your net profit — your business income minus allowable expenses. This is the figure that appears on your SA302 as "Profit from self-employment."
The Calculation
Total business income: £80,000
Less: Allowable expenses: £20,000
Net Profit (Assessable Income): £60,000
Key point for sole traders
Multiple Years
Most lenders require 2-3 years of accounts and will either:
- Average your profit across 2 or 3 years
- Use the latest year only
- Use the lower of the last 2 years
Ltd Company Directors
This is where income calculation becomes complex. As a director-shareholder, you have multiple income components, and lenders treat them differently.
Income Components
Salary
Your director's salary, typically low (around £12,570) for tax efficiency. Always counted by all lenders.
Dividends
Payments from company profits to shareholders. Most lenders count these.
Retained Profits
Profits left in the company. Only some lenders consider these.
Net Profit Share
Your percentage share of total company net profit. Some lenders use this method.
Common Calculation Methods
Salary Only
The most conservative approach. If you take £12,570 salary, that's your assessable income. Very few lenders use this anymore.
Salary + Dividends
The most common method. Lenders add your salary to dividends actually declared and paid to you. This is what most high street banks use.
Salary + Share of Net Profit
The most favorable method for tax-efficient directors. Instead of looking at what you extracted, lenders look at your share of what the company made.
Lenders using this: Nationwide, Halifax, Accord, Kensington, some building societies
The opportunity
Contractors
Contractors with day rate contracts have a unique situation. Lenders can either treat you like a self-employed person (using your accounts) or use a day rate annualization method.
Day Rate Annualization
Some lenders simply multiply your day rate to get an annual figure:
The Calculation
Day rate: £500
Days per week: 5
Weeks per year: 48 (allowing 4 weeks off)
Annual income: £500 × 5 × 48 = £120,000
The number of weeks used varies by lender:
- 48 weeks — Standard for contractor-specialist lenders
- 46 weeks — More conservative mainstream lenders
- 44 weeks — Very conservative approach
Requirements for Day Rate Treatment
- Usually need minimum 12-24 months contracting history
- Current contract or recent contract (within 6-8 weeks)
- Contract documentation showing day rate
- Some lenders require minimum contract length remaining
Averaging Methods Explained
Most lenders require multiple years of income evidence. How they combine these years significantly affects your borrowing.
Simple Average
Add up the years and divide. Smooths out variation but might not reflect current position.
Year 1: £50,000
Year 2: £60,000
Year 3: £70,000
Average: £60,000
Latest Year Only
Uses your most recent year. Best if your income is growing.
Year 1: £50,000
Year 2: £60,000
Year 3: £70,000
Used: £70,000
Lower of Last 2 Years
Conservative approach — uses whichever is lower. Penalizes income dips.
Year 1: £50,000
Year 2: £60,000
Year 3: £55,000
Used: £55,000
Projected/Growing Income
Some lenders recognize growth patterns and may weight recent years more heavily.
Year 1: £50,000 (×0.5)
Year 2: £60,000 (×0.75)
Year 3: £70,000 (×1.0)
Weighted: £63,750
See your borrowing under different methods
Use our calculator to compare what different income calculation methods mean for your mortgage.
Try the calculator