National insurance rise, salary sacrifice and mortgage affordability

Journalist: Anna Sagar, Mortgage Solutions / Specialist Lending Solutions

ended 01. July 2022

Interested in whether mortgage brokers are seeing an increase in clients opting for salary sacrifice or higher pension contributions which could mean they have lower earnings, and can borrow less on mortgage application. 

National Insurance changes next mean more people are falling into a higher tax next and one suggestion for higher earnings is to consider salary sacrifice (such as for bike schemes) or to increase pension contributions so they pay less tax. 

The flip side is that as salary is lower you can borrow less on a mortgage application. 

  1. Are you seeing more client opting for salary sacrifice or higher pension contribution due to upcoming tax changes?
  2. Has the amount they can borrow significantly lower?
  3. Is this or could this be a long-term trend in the market as taxes rise?


3 responses from the Newspage community

A common misconception is that paying into a workplace or private pension reduces your taxable income, which you may think would reduce how much of a mortgage you can borrow. However, several mortgage lenders add pension payments back into your gross income. So they won't penalise you if you're saving for retirement. This is because pension contributions are voluntary; you could, in theory, stop paying into your pension if you chose to. Lenders bank on the fact that if things get tight, you'll pause your pension contributions and pay your mortgage. So if you're worried about making additional payments into your pension but concerned you won't get the mortgage you need, you can breathe a sigh of relief.
As a whole the change in the NI rate and limits has had little impact on mortgage affordability, from what I can see. Pension contributions can very much impact on affordability, but it also very much depends on the lender - some lenders will take pension payments into account in their calculations, whilst other will not, so knowing which lenders to approach is very much key in these situations,.
Clients will act according to their financial goals. The greatest ambition for a young professional will be obtaining their first home and until recently pension contributions may have been an afterthought. Since the government introduced auto enrolment in 2012 attitudes have shifted however there still needs to be more education on the subject, such as the 60% tax trap for earners of £100,000 and £125,140. The dilemma is, do you increase pension contributions to save on tax payments or not pay into your pension so you can raise a larger mortgage? £25,000 will equate to circa £100k of mortgage borrowing, which could make all the difference when buying the perfect home. The good news is that many mortgage lenders are understanding and can ignore pension contributions from affordability. This is positive as it ensures that borrowers can take full advantage of paying into their pension without it impacting on their home ownership dreams. We think that paying more into pension schemes is a positive move, especially for younger borrowers where compound interest will have the largest effect.