Mortgage for a Company Director on PAYE

Can you explain what a company director on PAYE is? Is it more difficult to get a mortgage as a company director on PAYE?

A limited company director will usually have some form of PAYE, where their salary goes through payroll and the director is additionally remunerated by dividends.

Very typically, we might see somebody taking PAYE income up to the amount you can earn without paying income tax. Anything else they take from the company will be classed as dividends, which are taxed in a different way.

Usually that’s the most efficient way to get money out of the limited company. A limited company is a separate legal entity, so even if you are the sole director, the money belongs to the company and you have to find a way to take it out and then pay the appropriate tax.

One small issue with taking dividends is you cannot take them unless the company is profitable to that level of income. That can sometimes be problematic with cash flow.

If a company director is receiving their remuneration fully through PAYE and payslips, we would ask why, as we would usually expect them to take this as dividends. Often the answer is that the company is yet to become sufficiently profitable to remunerate the director. Getting a mortgage can be difficult if the company isn’t profitable.

Can I get a mortgage if I’m a company director on PAYE and only have one year’s accounts?

Theoretically, yes. But when we present that income to a lender, they will ask whether the business is profitable enough to support the income that you’re taking.

Lenders need to work out what income you receive and whether that’s sustainable in the long term. Sometimes a company director that’s exclusively on PAYE is running a startup that’s expected to do very well. It might be almost exclusively funded by investors.

The entrepreneur/director agrees to take a salary for the first three years at a certain level. That allows the company to become established and build bigger profits to support the company director and give a return to the investors.

In this case, the company won’t be profitable at the point of applying, and the lender will not accept that income as sustainable.

But if somebody is taking their income fully through PAYE, they only have one year’s accounts but their profit supports their salary and more, there’s every chance a lender would agree to lend.

What is the difference between PAYE and limited? Does this affect the mortgage process?

PAYE is Pay As You Earn, and most people who are employed in this way get a payslip, and tax and national insurance is deducted from that. It’s paid in real time to HMRC.

If you are a limited company director and you’re on PAYE and dividends, the PAYE element including your national insurance and tax, if you are over the threshold, is paid in real time to HMRC. The dividends are declared annually as part of your self-assessment.

Limited relates to the company. A limited company is a separate legal entity, and the money it earns belongs to that company.

For a company director to take any of that money, they either do it through PAYE payslips, in which case their tax and national insurance will be paid, or through dividends, which are declared to HMRC at the end of the financial year.

How will lenders assess my income as a company director on PAYE? How is affordability calculated?

To assess a company director’s income, lenders usually ask for a document called an SA302. Most people are unaware of it – they don’t need it until they want a mortgage. It’s part of your self-assessment and details all the income you’ve had by source.

That might be dividend income, PAYE income, Trust income, a bank interest or property income. Any source of income is stated on that and your tax calculation is worked out from there.

Most lenders ask for that because it shows the PAYE element and dividends – they make their assessment of your affordability based on that.

If you’re exclusively PAYE, they want to see that the company is profitable through your company accounts. If the accounts support that PAYE income, we can proceed based on the salary shown on your payslips.

What documents do I need to prepare?

If you’re paid through PAYE, you will want your payslips for the last three months and an SA302 for the last two years, if possible.

If you’re exclusively PAYE, you need a couple of years’ accounts, too, showing how the business has performed. A lender may also want your accountant to complete an accountant’s certificate, stating how the company’s performing at that time.

Accounts and personal tax returns tend to be done annually, so there can be quite a big gap between declaring your income and applying for the mortgage. The accountant’s certificate tells the lender that the company is still healthy and achieving consistent income levels.

What if my payslips are not considered as PAYE income?

A payslip is the breakdown of your PAYE income. It will say what you’ve been paid and list any taxes and national insurance contributions. If it doesn’t have that information, it’s probably not a payslip.

You might have a remittance slip or an invoice, or perhaps you’re deemed a contractor. Get your documents in front of an advisor and we’ll see how they might be viewed by a lender.

Can I get a mortgage as a company director on PAYE if my accountant is maximising business profit for tax purposes?

You need to take personal advice on this. But generally, an accountant usually works to minimise profit for tax purposes – because they want you to pay as little tax as possible within the rules.

But when you want a mortgage, you’ll want your documents to show you are earning as much as possible. Those two things are at odds with each other, so I always recommend having a three-way conversation. We often speak to accountants ahead of time to see what could be declared and the potential consequences for mortgage lenders.

From there we can give you personalised advice on how things are treated within your business.

How much can I borrow? What deposit will I need?

The mortgage size will come down to the income you’re declaring and how the lender sees it. Much the same as any other mortgage, you need a minimum of 5% deposit in most instances. Again, personal advice helps.

Can I get a Buy to Let mortgage as a company director on PAYE?

One of the key differences with Buy to Let is that some lenders aren’t concerned with how much income you have as an individual. They’ll look exclusively at the potential rental return.

If your income is in a form a lender won’t accept, you will still have options for Buy to Let mortgages.

How does bad credit affect me getting a mortgage as a company director?

Bad or adverse credit can be a challenge for everybody, regardless of how they earn their income. It depends how severe it is.

If you’ve already got something a bit nuanced in your income, bad credit just means there’s more to overcome. There’s no substitute for speaking to an advisor about that. If something on your credit file is causing a problem, we can guide you.

Perhaps it will be better to wait for six months or there are things you can do to improve your file. Having a conversation with an advisor will certainly give you clarity.

How does remortgaging work as a company director on PAYE?

If your income is not accepted by a lender, but you’ve already got a mortgage and your current product is coming to an end, there’s every chance we can still get a new product for you without moving to a new lender.

Again, your personal circumstances are the main factor, but it’s not prohibitive. You don’t have to sit on the standard variable rate, so it’s well worth having a conversation.

How can a mortgage broker help? Anything you’d like to add?

As always, having somebody to guide you through this process can save you a lot of money, potentially, and ensure you’re getting the right product. We’re here to clarify what you can and can’t do. There really is no substitute for good advice.

Key Takeaways:

• Company directors on PAYE usually receive a minimal salary via payroll and are primarily remunerated by dividends, which is generally the most tax-efficient method for extracting funds from a limited company.
• A key challenge in securing a mortgage is demonstrating the company’s profitability, as lenders need assurance that the business is earning enough to sustainably support the director’s salary and income, particularly if they are exclusively on PAYE.
• Lenders assess affordability based on documentation like your SA302 form – a part of your self-assessment that details all income sources, including PAYE and dividends.
• It is generally recommended to have a three-way conversation involving you, your mortgage advisor, and your accountant, as the goal of minimising business profit for tax purposes conflicts with the need to show maximum income for a mortgage application.
• A mortgage broker is highly valuable for company directors, as they can guide you through the nuanced process, clarify what different lenders will accept as income, and help ensure you secure the most suitable product.