Mortgage for a Company Director on PAYE
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Mortgage for a Company Director on PAYE
Aaron Tyson explains how the mortgage application process works for self-employed professionals from the banking and finance sector.
Can you explain what a company director on PAYE is? Is it more difficult to get a mortgage as a company director on PAYE?
This is where we have a company director who gains most or all of their self-employed income through a director’s salary.
It’s paid as PAYE, so effectively the taxation levels are the same as for someone who’s employed. Generally, self-employed applicants will minimise what they take on PAYE and also have dividends. That’s unique to company directors and their ownership structure.
It isn’t more difficult to get a mortgage as a company director on PAYE. We need to see the same documentation as for any self-employed client – which is generally the HMRC tax calculation and tax year overview.
The tax calculation confirms the director’s salary and also shows dividends, plus any profit from land and property or any other income – such as from a pension. Everything is shown on the tax return.
The tax year overview confirms that the required tax has been paid. A sole trader’s personal tax return would show ‘profit from self-employment,’ while a personal tax return for a company director may show ‘director’s salary’. Realistically, those are both taxed the same way as PAYE.
If you have the most recent two years’ tax calculations and tax year overviews we can take a look at how to utilise that.
Can I still get a mortgage if I’m a company director on PAYE and only have one year’s accounts?
Yes, it is possible. One high street lender allows that, so we can still get good rates even with quite niche criteria. It has to be your first year’s personal tax return for that particular option, but it’s certainly possible.
What’s the difference between PAYE and LTD? Does this affect the mortgage process?
This question may be coming from an assumption that banks look at PAYE and self-employed income in a similar way.
Someone who is employed by a company will have a basic salary on a PAYE basis, while a director of a limited company has different options on how to take an income.
You may have a director’s salary which is PAYE, with tax paid at source, and you’ve also got the ability to take dividends. While you might think that those PAYE payslips can be utilised for affordability, that’s not the case for a limited company director. Lenders will want the HMRC personal tax returns.
So whether it’s PAYE or limited doesn’t affect the mortgage process – it just affects the documentation. If you’re a company director, it always defaults to the personal tax returns.
How will lenders assess my income as a company director on PAYE? How is affordability calculated?
Post Covid, we did see some restrictions around self-employed income, but we don’t have these anymore. A limited company director or a sole trader can now borrow the same as someone on a permanent contract with an income at the same level.
There’s no affordability difference if it’s salary and dividends, or just salary – it’s all utilised in the same way. In a way, looking at personal tax returns is easier, because everything is on one document. It’s a yearly figure and all the figures on it can be used in some way.
Someone who’s employed may have commission, bonuses, overtime or Construction Industry Scheme income. In some cases, only a percentage of each type of income can be utilised. But with self-employed applicants everything is on the tax return and can be used.
What documents do I need to prepare?
Director’s salary is very easy to show on tax calculations and tax year overviews, but we can also show your income on finalised company accounts. Banks can use those to see your director’s salary for the year.
In that scenario, you’re also able to utilise your share of net profit. Sometimes a client’s company has been doing really well and they don’t necessarily need to take all the income they’re actually earning within the company. We may be able to show the health of that business using the director’s salary and the net profit in those finalised company accounts.
It’s rare that a lender will ask for both documents. They can look at one or the other, depending on the client. They may also utilise an accountant’s certificate. We would have a discussion with you first to understand which of those two sets of documents is likely to be more beneficial to you.
What if my payslips are not considered as PAYE income?
If you’re an employee, your payslips are fine. We’ve also covered in another podcast that you can be a shareholding employee, where you get dividends and do a personal tax return. But all the way up to 33% ownership, you can still be classified as an employee.
For an employee, payslips matter. We use them to see the basic income, bonuses and other different streams of income.
If you’re a director of a limited company and own more than 20% or 25% of the business, your payslips don’t matter and you can’t use them for mortgage underwriting. You could pay yourself eye-watering figures over a three-month period and show payslips for that – so banks won’t utilise those.
They instead use your personal tax returns to see your director’s salary, or your share of net profit on company finalised accounts.
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Can I get a mortgage as a company director on PAYE if my accountant is maximising my business profit for tax purposes?
This is the Catch 22 for self-employed applicants. The self-employed have a bit more control over when income is taken and what tax is then paid on it.
We often have self-employed applicants with retained profits – you would pay corporation tax on those, but they wouldn’t be classified as part of your personal income for tax.
I think this question is asking about how tax efficiency affects a mortgage. Being tax efficient makes sense, of course, but it can mean that your income looks lower than what’s truly being earned. Based on your personal tax returns, we’ll then get less borrowing than may otherwise be achievable.
If we’re looking at finalised company accounts, where a director has paid themselves less that year, but there’s a strong net profit, we can get a higher potential borrowing amount. That’s the upside of using company accounts – but you need at least two years’ worth.
With personal tax returns, it’s a minimum of one, and that should be your first year. With company accounts, we need two.
As always, it depends on the overall situation. We haven’t touched on putting funds into your pension to bring down your corporation tax. We haven’t covered accountant’s certificates and how they work. But company accounts may be best for in this situation, because they show a true reflection of the earning position, even if you’ve not needed to take all that income.
How much can I borrow and what deposit will I need?
It depends on your income and what you’re putting down as a deposit. On average, you can borrow around 4.5 times your PAYE director’s salary if with a 5% deposit.
But that can go all the way up to six times for first-time buyers if we’re opting for a five year fixed rate. Certain products allow for higher levels of borrowing for first-time buyers.
A deposit worth 5% of the property’s value is the minimum, generally. With 10%, you could get 5.5 times your combined income and perhaps up to six. It’s different for everybody. Criteria are changing a lot, with enhanced income multiples coming in, and while there aren’t many for home movers yet, we are seeing it for first-time buyers and remortgages.
Different deposits also have a huge impact on the rate. With a 5% deposit the rate is going to be quite high. At 10%, 15% and 25% the rate will get progressively better.
Can I get a Buy-to-let mortgage as a company director on PAYE?
Buy-to-let borrowing isn’t really based on income. It’s viewed from an investment perspective, looking at the property and checking if the rent it generates meets the lender’s calculations.
A client’s earnings are much less important than for residential. For Buy-to-let there might just be a minimum income threshold with some lenders. For an experienced landlord, often there’s no minimum income requirement.
You could be a company director, but your company accounts or personal tax returns don’t show a huge income – and that’s fine. You can absolutely get a Buy-to-let mortgage as a company director. Whether you’re paying yourself a salary or dividends, you’re just as eligible as someone on an employed contract.
How does bad credit affect me getting a mortgage as a company director on PAYE?
The same way it would impact anybody. Being a company director doesn’t change the impact of bad credit.
We just need to know what the issue is, how long ago it was and the situation was. Are we looking at a default, a County Court Judgment (CCJ) or something more severe? That will inform your options.
We’ve got prime, high street lenders where you need to have a pretty good credit history. At the other end of the spectrum is the subprime market, which focuses on quirky properties, bridging finance, commercial borrowing and adverse credit.
Some lenders sit in the middle. If there are one or two blips on the credit file, it doesn’t push us completely into subprime, but we may not get prime. Some lenders accept one or two things on a credit file, perhaps a smaller default or issues with a telecommunications bill.
Every bank has different criteria. Bad credit affects company directors, regardless of whether they take a salary or dividends. It works the same way as for the director of a partnership, a sole trader or a permanent employee.
How does remortgaging work as a company director on PAYE?
It’s still based on affordability – your income, expenditure, etc. It’s the same as for a director who’s paying themselves a salary and dividends or someone who is employed.
Sometimes people think that for a company director there’s a completely different assessment of income, but there really isn’t. It’s always based on what income we can show. Whether that’s through personal tax returns or company accounts is something we will explore with you straight away.
How can a mortgage broker help here?
With self-employed applicants, there’s a little more flexibility. There can be nuances around understanding the accounts and different ways to present a case.
If you were to read a lender’s criteria page around self-employment, you might struggle to understand how that lender would treat your self-employed income. But a broker like us knows how to obtain great value, and also which criteria to focus on for your position.
Our experience and knowledge about banks’ underwriting processes and criteria can really benefit a self-employed applicant. We may get the same outcome as for someone on a PAYE basic salary, but the journey will be different.
We make sure that the whole process is as smooth as possible and you’ll get the outcome we’re looking for. That’s where we add value.
Key Takeaways:
- Obtaining a mortgage as a company director on PAYE is generally not more difficult than for other self-employed applicants.
- Lenders do not assess affordability using PAYE payslips; they rely on the HMRC personal tax calculation and tax year overview, which detail director’s salary, dividends, and other income.
- It is possible to get a mortgage with only one year’s personal tax return, provided it is the first year’s return.
- The affordability calculation treats a limited company director’s income (including salary and dividends) the same as income for someone on a permanent contract.
- If your personal tax returns reflect a lower income due to tax efficiency, using finalised company accounts to show a strong net profit may achieve a higher borrowing amount, though this typically requires two years of accounts.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE MOST BUY TO LET MORTGAGES.
For specialist tax advice, please refer to an accountant or tax specialist.