For sole traders, lenders look at net profit — turnover minus allowable expenses — as declared to HMRC. That single fact catches people out, because a business turning over a healthy sum can show a modest taxable profit after legitimate deductions. Some lenders average the last two or three years; others use the latest year alone, particularly where profit is falling. The spread between the most and least generous is wide enough to be worth planning for.
Averaging versus latest year
Where profit is rising, being assessed on the most recent year is better for you. Where it's falling, an average is kinder — but many lenders deliberately use the latest year in that situation, taking the more cautious view. Knowing which direction your figures are moving tells you which lenders to look at first.
The tax-efficiency tension
Claiming every allowable expense reduces your tax bill and your assessed income at the same time. That is the trade-off every sole trader faces, and it is far easier to manage a year or two before you plan to borrow than in the month you apply. If a mortgage is on the horizon, it's worth a conversation with your accountant about the balance.
What to have ready
- SA302s (tax calculations) for the last two to three years
- Matching tax year overviews from HMRC
- Business and personal bank statements, usually three to six months
- Certified accounts if you have them prepared
- Your accountant's details
If your figures dipped
A single weaker year is not fatal, particularly with a credible explanation — a period of illness, a large one-off investment in the business, or a lost contract since replaced. Lenders assess these individually rather than by rule, so context genuinely helps.