If you’re looking to understand how lenders treat salary or dividends for a mortgage, you’re in the right place. We arrange mortgages for limited company directors, and the way you pay yourself matters far less than which lender reads your figures.
Quick answer: do lenders use salary or dividends for a mortgage?
Both. Many lenders add your salary to the dividends you have drawn, averaged over the last two years. Some specialist lenders use your salary plus your share of the company’s net profit, and sometimes retained profit. That route helps directors who leave money in the business.
How do most lenders read salary and dividends?
The standard route treats you as the person on your tax return. The lender adds up the salary and dividends you have actually taken out of the company, takes an average of the last two years, and uses that figure for affordability. Your SA302s and HMRC tax year overviews are the evidence, because they show what you declared personally.
For a director who draws everything the company earns, this works well. The trouble starts with the way a lot of directors are advised to pay themselves: a small salary, dividends on top, and the rest of the profit left in the company. On paper, your personal income then looks much smaller than the business you run.
What if you leave profit in the company?
This is where the choice of lender changes the answer. Some specialist lenders will assess you on your salary plus your share of the company’s net profit, and in some cases its retained profit, where their criteria allow it. That reflects the income available to you inside the company, without you having to draw it first.
We placed one director with Saffron Building Society on this basis: salary plus net profit after tax, using only his latest year’s figures. His second year’s profit was around £90,000 higher than his first, so a two-year average would have understated his income and the case would have failed. He borrowed £415,000 at 82% loan to value without forcing extra dividends out of the company or paying personal tax he didn’t need to pay.
One method isn’t better than the other in every case. It depends on how your income is structured and which lender fits it, and that is the work Jones & Young’s director mortgage team does before any application goes in.
Should you pay yourself bigger dividends before applying?
Not without checking first. We have taken over cases where a previous broker told the client to inflate his dividends to show more income, and that meant a bigger personal tax bill for a result a different lender could have reached on his existing figures.
Dividends above your allowance are taxed at your dividend rate, and the rates depend on your income band. GOV.UK’s guide to tax on dividends sets out the current allowance and rates. Speak to your accountant before changing how you pay yourself, and ask your broker whether the change is needed at all.
Does it matter how much of the company you own?
Yes. Lenders commonly treat directors who own around 20 to 25% or more of a limited company as self-employed, and assess them on accounts, salary and dividends rather than a payslip. With a smaller shareholding, some lenders will assess you in a similar way to an employed applicant.
The threshold varies between lenders, and it is about mortgage assessment only. It has nothing to do with how you are treated for tax or employment law.
What if you have more than one company, or only one year’s accounts?
Two companies can catch you out. Some mainstream lenders count only half of the income from a second company. We arranged a purchase with Halifax for a client drawing salary and dividends from two companies, and the lender counted all of the income from both.
A young company is not a dead end either. Some specialist lenders will accept one year’s accounts, especially where trading is strong and a qualified accountant supports the figures. We have placed a newly established director on his first year’s figures after a mainstream lender had declined him.
What documents will a lender ask for?
The exact list differs from lender to lender, but expect some combination of these:
SA302s, showing the income you declared to HMRC on your personal tax return. HMRC tax year overviews, confirming the tax position for the same years. Certified company accounts, prepared by your accountant. Dividend vouchers, showing the dividends you have taken.
Have them ready before you apply. If you pay yourself through the company, GOV.UK’s guidance on taking money out of a limited company explains how salary, dividends and director’s loans are each treated.
When is it worth speaking to a specialist?
If you take a low salary, retain profit, own more than one company, or have fewer than two years of accounts, the lender you choose will shape what you can borrow more than anything else. Bring your last two years of accounts and tax calculations to the first conversation, and a broker can tell you which lenders will read your income the right way before you apply.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Jones & Young is an independent mortgage broker based in Petersfield, Hampshire, specialising in self-employed clients, company directors and CIS workers. Jones and Young Limited is authorised and regulated by the Financial Conduct Authority, Financial Services Register number 950544.
