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Yes, with some lenders. Most high street lenders assess a limited company director on salary plus dividends, which understates what the business earns if you leave profit in the company. A smaller group of lenders will use your salary plus your share of the company’s net profit after corporation tax instead, whether or not you have drawn it. The money does not have to leave the company.
This post explains how the two methods differ, why they can give very different borrowing figures for the same director, which lenders tend to use retained profit, and what I check before I suggest that route. It sits alongside my main page on mortgages for limited company directors, which covers the salary and dividends route in more depth This post is part of my self employed mortgage hub, where every guide I have written for sole traders, directors and contractors sits in one place..
Most high street lenders assess directors on salary plus dividends. A smaller group use salary plus share of net profit after corporation tax.
Retained profit does not need to be drawn out of the company to count. The lender reads it from the accounts.
Fewer lenders, more underwriting and a bigger paperwork list. Worth it when the dividends route does not add up.
How do lenders calculate income from retained profits?
A lender using retained profit takes your director’s salary and adds your share of the company’s net profit after corporation tax, in proportion to your shareholding. So a director who owns half the shares of a company that made £80,000 after tax, and who took a £12,000 salary, would be assessed on £12,000 plus £40,000, which is £52,000. Most lenders using this method average the last two years of accounts, and some will use the latest year alone if it is the lower of the two. That income figure then goes through the lender’s normal affordability model in the same way as an employed salary.
The figures come from your filed company accounts, signed off by a qualified accountant, alongside your SA302s and tax year overviews from HMRC, three to six months of personal and business bank statements, and proof of your shareholding. Some lenders also ask for an accountant’s certificate confirming the retained profit, and a few want the accountant to confirm that drawing it would not harm the business. If you need a reminder of what the HMRC documents look like, I have a separate post on what an SA302 looks like.
A small number of lenders go further and work from profit before corporation tax. That gives a higher figure again, but it is a narrow part of the market and not one to plan around.
Why do salary plus dividends and retained profit give different figures?
Because they measure different things. Dividends are what you chose to take out of the company. Net profit is what the company actually made after tax. If you took out less than the company earned, which is what happens whenever profit is retained, the dividends route understates your income and the retained profit route does not.
It can cut the other way too. If you paid yourself dividends from reserves built up in earlier years, your SA302 can show more dividend income than the company made that year, and a lender working from net profit will use the lower figure. So the right method depends on how you have actually run the company, not on which one sounds more generous.
I placed a retained profits case where the director’s salary and dividends were simply too low to make the numbers work on the standard method. The company was profitable, but most of that profit had stayed in it. A lender that assesses on retained profit was the route, and it turned a case that did not fit into one that did.
That is one case, not a rule. Every lender applies its own criteria and every application is assessed on its own facts. It does show why the first question I ask a director is not how much they earn, but how the company has been paying them. If you think your own figures look like that, I am happy to talk it through.
What I would check first
The first thing I look at is the gap between what you have drawn and what the company has made. If your salary and dividends already support the borrowing you want, the standard route is simpler and opens up more lenders, and there is no reason to go anywhere near retained profit. If they do not, I look at the last two years of accounts and ask whether the net profit figure closes the gap.
Then I check the shape of the business: how many shareholders there are and what your share is, whether profit has been rising or falling across the two years, whether the latest accounts are recent enough for a lender to use, and whether there is anything unusual in the accounts, such as a director’s loan account, that a lender will ask about. I also check the rest of the application, because retained profit lenders take a closer look at the whole case, not just the income.
What I do not do is tell you how to structure your pay. Whether to take profit as dividends, leave it in the company, or change the mix is a tax question with consequences well beyond the mortgage, and it belongs with your accountant. My job is to show you what each set of figures does to the borrowing and then let you and your accountant decide.
Speak to an expert
Director with profit sitting in the company and a borrowing figure that does not reflect it? Send me your last two years of accounts and your SA302s and I will show you what the salary and dividends route gives, what the retained profit route gives, and whether the difference is worth chasing.
Which lenders use retained profits?
Most high street lenders do not. Their standard assessment for a director is salary plus dividends, and if that figure is short the application is short. The lenders that will use retained profit are a smaller group: some specialist lenders, and some mainstream names with specialist underwriting teams that handle these cases away from the branch and call centre process. I do not name lenders here because criteria change, but this is exactly the sort of panel check I run before recommending a route.
Two things follow from that. The choice is narrower, so there is less room to be fussy about other parts of the application. And the underwriting is slower and more manual, because a person is reading your accounts rather than a system reading your payslips. Neither is a reason not to do it. They are reasons to have the paperwork ready before you start.
Is there a downside to using retained profits?
The main ones are the narrower choice of lender and the heavier paperwork. There can also be a question from the lender about whether the profit is genuinely available, which is why some ask your accountant to confirm it. Beyond that, the decision to leave money in the company or draw it has tax consequences of its own, and those are for your accountant, not for me.
If you are a contractor working through your own company, retained profit is one of three ways a lender might look at you. The other two are salary plus dividends and, for day rate contractors, the contract rate itself. I have set out that comparison in my post on day rate versus PAYE for contractors.
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