Mortgage for Company Director on PAYE

What is a company director on PAYE – and is it more difficult to get a mortgage this way?

If you’re a company director with at least 20% shares in the business, even though you might be drawing a salary through PAYE, mortgage lenders will consider you to be self-employed. Some mortgage lenders will consider you self-employed once you reach 25% shares.

As a director of a business, you might decide that to get a mortgage you will just increase your salary to £100,000. That would seem a nice and easy way to get a mortgage, just showing three months’ pay slips.

But if you own more than 20% of a business, that doesn’t happen. Mortgage lenders aren’t daft – they will treat you as self-employed, looking at your income over a two year period. A one year period is possible, but the high street banks are going to look at a two year period.

That income would be the salary you’ve drawn on PAYE, plus any dividends as a share of the net profits. Normally, that’s evidenced by self-assessment, or by looking at company accounts. There are different methods for different rates.

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

This happens quite often – I probably get four or five cases like this a month. It’s either a new startup business or somebody has moved from being a sole trader to a company director as a more tax efficient way of being paid.

It could be done with just one year’s accounts, depending on the situation. There’s actually a famous high street bank that will consider it. Off the high street, a lot of building societies and specialist lenders for the self-employed could do one year accounts.

What’s the difference between PAYE and limited? How does this affect the mortgage process?

PAYE, pay as you earn, means you are drawing a salary and paying tax every month according to your tax code. But you could be PAYE working for somebody else in an unrelated job or profession. Or you could be PAYE working in a company you have shares in – or perhaps you own 100% of it.

It’s still PAYE, but for mortgage purposes, when you get to ownership of 20% to 25% minimum, mortgage lenders stop treating you as employed and start treating you as self-employed.

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

Mortgage lenders have two different ways of assessing income if you’re a company director, taking your salary out of the business. I’m going to assume here that you own 20% or 25% of the business, so a mortgage lender will assess you as self-employed.

One way is to look at your individual salary and dividends drawn from your personal self-assessments due for the fiscal year – April to April. It could be quite helpful if you’re taking out the maximum from the business.

But not everybody wants to withdraw salary and dividends from the company if they don’t need to – because then you’ve got to pay personal tax on it. Some people prefer to let the money build up in the company. The minute you draw it out of the company you’re paying personal tax which could be as much as 40% or 50%. In some circumstances, you could even lose your nil rate banding, if you’re going above £100,000.

Some mortgage lenders, instead of looking at personal income on a self-assessment, look at the company’s income and performance over the latest year or last two years. They’ll look at the salary you’ve drawn from the business and your share of the net profit. Some mortgage lenders look at net profits after corporation tax.

So if you own all of the company, then obviously 100% of that net profit belongs to you. If you’re in a partnership, maybe you’ve got 50% of that profit. One or two mortgage lenders will actually look at the higher figure of profit before tax, plus salary, which could give slightly enhanced mortgage borrowing capacity.

It’s nice to have options there, because one size doesn’t always fit all.

What documents do I need to prepare?

I always ask every company director for two sets of documents – because I don’t know what’s going to be the right way until I look at the overall situation. I’ll ask for their last two years’ self-assessments.

I even ask for a copy of their full tax calculation. That will show me the turnover and performance of the business. On top of that, I’ll ask if they’re a company director and what shares they have in the company. If it’s at least 20% or 25%, I’ll ask for copies of the company accounts for the last two years.

There’s usually about 20 pages of that and it tells me more information. I’ve then got all my ducks in a row to look for the right mortgage solution. Sometimes those full tax calculations tell me a little bit more, such as if there is rental income and rental expenses.

We then need deposit documents, if you’re buying property, to show where the money’s come from. We’re going to need address ID and photo ID and bank statements, usually for the last three months.

We make sure that the bank statements show that the level of turnover month to month is consistent with what’s on the self-assessments or company accounts. If it doesn’t show that in the last three months, we will want an explanation from your accountant of where that money has gone, as that’s going to be a question raised by the mortgage lender.

What if my pay slips are not considered as pay as you earn income?

The only way a payslip couldn’t be PAYE income is if it was a CIS payslip. That’s the only other type of payslip. You might get remittance statements for contractors or invoices, but an actual payslip is either going to be PAYE with tax and national insurance deducted.

If it’s for somebody working in the construction industry, who might also have their own limited company, that would have 20% CIS tax deducted.