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Most lenders add your director’s salary to the dividends declared on your tax calculation, then average the last two years. If the latest year is lower than the year before, most will work from the lower figure rather than the average. Some use the latest year on its own, and some ignore dividends altogether and assess salary plus your share of the company’s net profit. 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.
Which figures does the lender actually use?
For a limited company director the starting point is your personal tax paperwork, not the company’s. Lenders ask for your SA302 tax calculation and the matching tax year overview from HMRC, usually for the last two tax years. The tax calculation shows your salary from the company and the dividends you declared. The tax year overview confirms the tax was actually paid, so the two documents have to agree.
Alongside those, most lenders want the company’s filed accounts for the same period, and some ask for an accountant’s certificate confirming your shareholding and how you pay yourself. The accounts matter because the lender cross checks your dividends against the profit the company made. If salary and dividends together are higher than the profit that year, the lender will usually cap your income at the profit figure.
One point that catches directors out: the lender can only count what is on the tax calculation. Money taken from the company by another route, such as a loan from the company that has not been declared as a dividend, is not income in the lender’s eyes until it appears on your tax return.
How does the two year average work?
Say the tax calculations show £45,000 of salary and dividends in year one and £55,000 in year two. A lender that averages uses £50,000. A lender that takes the latest year uses £55,000. Now reverse it: £55,000 in year one and £45,000 in year two. The average is still £50,000, but most lenders will now use £45,000, because the rule is generally the lower of the latest year and the average. The direction of travel matters as much as the totals.
Most lenders average two years of salary and dividends, and use the latest year if it is lower.
Only dividends declared on your tax calculation count, and they need to be covered by the company's profit.
If you leave profit in the company, some lenders assess salary plus your share of net profit instead.
What happens when the latest year is lower?
This is the pattern I see most often with directors who pay themselves in salary and dividends. Year one was strong, year two was softer, and the client walks in expecting to be assessed on the strong year. Instead the two year average drags the usable figure down, and with a lender that takes the lower of the latest year and the average, it drops further still.
Lenders do this because they are looking for income that will carry on for the life of the mortgage, and a falling year raises the question of whether the lower number is the new normal. Most will want to know why the year dipped. A one off cost, a slow quarter with a clear reason, or a deliberate decision to leave profit in the company all read differently from a business that is shrinking, and an accountant’s explanation can change how the figures are treated. What it will not do is turn a lower year into a higher one. If the numbers in front of you rely on the strong year, it is worth knowing that before you find a property, not after.
Do dividends have to come from profit?
Yes. A dividend is a share of profit, so a lender checks that the company made enough to pay it. Where the dividends on your tax calculation are higher than the profit in the accounts, the lower figure is what gets used. Where a large dividend was taken shortly before the application, some lenders ask your accountant to confirm it has not left the company short. If your accountant has advised you on how much to draw and when, that is a tax question and one for them, but it is worth telling me the reasoning so I can match it to the right kind of lender.
What is the net profit route?
Some directors keep most of the profit in the company and draw a small salary and modest dividends. On a salary plus dividends assessment that shows up as a low income even though the business is doing well. A number of lenders will instead assess your salary plus your share of the company’s net profit, before or after corporation tax depending on the lender, whether or not you drew it. That can be a very different figure. It usually needs full accounts prepared by a qualified accountant rather than just the tax calculations, and the lender will still want to see that the profit is consistent. The limited company director page covers who tends to fit that route.
What I would check first
Before anything else I would put the last two tax calculations and the last two sets of accounts side by side and work out three numbers: the two year average of salary and dividends, the latest year on its own, and salary plus your share of net profit. Those three figures tell me which type of lender fits your case and roughly what each would lend, and they show up any gap between the dividends you declared and the profit that supported them. If the strong year is the older one, I would rather you knew that now. What I cannot do is tell you how to pay yourself; that is your accountant’s territory. I can only show you how each option is read by a lender.
Speak to an expert
Paying yourself in salary and dividends? Send me your last two tax calculations and the company accounts and I will show you which figure each type of lender would work from, before you commit to a property.
Documents lenders ask a director for
For the salary and dividends route, expect to provide SA302 tax calculations and tax year overviews for the last two tax years, the company’s filed accounts for the same period, three months of personal and business bank statements, and sometimes an accountant’s certificate. If you have never seen one, the post on what an SA302 looks like shows where to find it in your HMRC account. For the net profit route the accounts carry more weight and the lender may want your accountant to hold a recognised qualification.
Every director’s numbers are different, and the right lender depends on how your income is split, which way it has moved and what you want to borrow. Working that out with the figures in front of you is exactly what an advice appointment is for. Call me on 01425 203055 or book a 15 minute call and I will run the three numbers with you.
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