Limited Company Directors
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Limited Company Directors Frequently Asked Questions
Michael Webb talks us through mortgages for limited company directors.
Are there mortgages tailored to limited company directors?
Some criteria are tailored around limited company directors, rather than the mortgage itself. There are, however, some specific products that relate to contractors who operate through a limited company. Generally, there are no specific mortgages for limited company directors, it’s more about the criteria around how they will be treated.
How do I prove my income and document my trading history?
For a limited company director there are a few ways that a lender may assess your usable income, depending on how you operate.
A limited company director might choose to retain their profits within the business. Some lenders will look at your accounts and take that retained profit as your income, whether or not you withdraw that under your personal name for tax purposes. You could alternatively draw income as a taxable dividend – most lenders will accept this as income.
Accountants often advise limited company directors to run an amount of money through PAYE, because every individual has a tax-free allowance that’s also free of National Insurance Contributions. It’s very common for lenders to look at either your PAYE income plus your dividends or your PAYE income plus your share of retained profit after corporation tax.
To prove that income, lenders are likely to ask for the last couple of years’ accounts, signed off by an accountant. When accounting periods end you have typically nine months to return the accounts. So if we’re getting into quite an old set of accounts, lenders may well also contact your accountant to ask for details of more recent trading history.
Some lenders also will just ask the accountant at the outset to break down those three elements and build up a picture of the income.
Do dividends count as income for a mortgage?
Yes, plus of course people may well have investments that are returning dividends. If, for example, you hold an investment account and stock in a PLC company and you’re getting annual dividends from that, that could be considered as income – but it’s much less common.
If you’re the majority or large shareholder of a limited company, where it’s effectively your job to run the business, dividends are a common part of your assessed income.
What if I have a fluctuating income?
This is one of the challenges for company owners or self-employed individuals, unlike someone who is PAYE employed who will typically have a continuous income. Your company could have a really good year or a bad year dependent on specific events.
Companies may well have been affected adversely by Covid, for example. Conversely some companies did really well during Covid and it was an anomaly in their accounting history. These things will be looked at and accountants may be asked to confirm, especially if there are large increases, that they are sustainable.
Lenders often negate some risk here by averaging – they would average the last two years unless it is a falling trend. Let’s say you made £80,000 one year and £100,000 the next. The income used would be £90,000. But if you made £100,000 and then £80,000 the income used will typically be £80,000 because your profits are reducing.
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What about pay as you earn income and retained profits?
Most limited company directors are advised by accountants that it’s tax efficient to take a PAYE income up to the threshold where no national insurance payments are required. The exact limit changes year by year, but it typically gives people around £900 a month as PAYE income. That’s net, because tax doesn’t apply.
What remains is your retained profit. To keep the maths easy, let’s say you make £100,000, which reduces after corporation tax. Let’s say it leaves you with £81,000 that you can retain within your business, if you don’t need to take it. Why pay tax on it if you don’t need to?
Alternatively, you could withdraw an amount as a dividend up to that limit. Obviously your accountant will be able to confirm what your usable income is based on the latest corporation tax requirements.
How much can I borrow as a limited company director and what deposit will I need?
This is exactly the same as for everyone else. How much you can borrow will depend on the available income as I’ve just discussed. We will also look at the background liabilities – the family situation and whether there are any dependents including children or any vulnerable adults.
Are there car loans, credit card debts or any other considerations like childcare costs or large pension contributions? All these things will be fed into a lender’s affordability calculator to identify how much you can borrow.
In terms of deposit, the market still has deals with just 5% deposit, depending on the individual situation. Just have a chat with us and we can let you know more accurately how much you can borrow as a limited company director and what deposit you’ll need.
Is there anything else we need to know about getting a mortgage as a limited company director?
The main thing is to work with someone who understands all the factors I’ve just described. Each lender will have a different approach to assess your income. There’s no one size fits all.
A broker will work to understand your situation and your business model, and then apply that to the lenders’ criteria to secure you the smoothest and best value mortgage application.
Your home may be repossessed if you do not keep up with your mortgage repayments.