Mortgage for directors

[Dino D]

You are a director of your own company and the company pays your salary as well as a dividend.

Do the banks consider the dividend and salary in the calculation?

Is it better for the purposes of getting a better mortgage to pay yourself a higher salary and less dividend?

Finally are you still considered self employed if you receive a salary from the company you are a director of (if there is more than one director for example your wife is also a director).

[Eric Mc]

They SHOULD take into account both streams of income. Some lenders understand the situation better than others.

LEGALLY, a director is NOT self employed - although lenders loosely refer to directors as "self employed" sometimes because they are not simple "employees" and run their own businesses.

[Sarnie]

Dino D said:

You are a director of your own company and the company pays your salary as well as a dividend.

Do the banks consider the dividend and salary in the calculation?

Is it better for the purposes of getting a better mortgage to pay yourself a higher salary and less dividend?

Finally are you still considered self employed if you receive a salary from the company you are a director of (if there is more than one director for example your wife is also a director).

Yes.

Neither, both are primary sources of income.

If you own more than 20% of the business then yes.

Hope that helps?

[User33678888]

When I took mine out I had to fill in a form detailing all of my income (different streams) and had to show proof. My salary is only about 10k but my income is a fair bit more. I found First Direct pretty good but I don't know if they are still competitive these days. It is possible.

[Sarnie]

User33678888 said:

When I took mine out I had to fill in a form detailing all of my income (different streams) and had to show proof. My salary is only about 10k but my income is a fair bit more. I found First Direct pretty good but I don't know if they are still competitive these days. It is possible.

It's not just possible, it's pretty simple if all figures and documentation stacks up.

[BlueNGT]

Dino D said:

You are a director of your own company and the company pays your salary as well as a dividend.

Do the banks consider the dividend and salary in the calculation?

Is it better for the purposes of getting a better mortgage to pay yourself a higher salary and less dividend?

Finally are you still considered self employed if you receive a salary from the company you are a director of (if there is more than one director for example your wife is also a director).

There is a preference now for Salary Plus dividend or Salary on its own by the majority of Lenders....a few lenders moved away from Net Profit or Profit on Ordinary Activity before Tax over the last 12 months.

Some will take Salary on its own which seems madness as the business could be loss making but you can still draw salary of course....not so with dividends.

No need to alter the way you pay yourself for a Lender. If you own more than 20% most will consider you self employed.

[AndrewO]

I've always paid myself a small salary and the rest divi's. As long as you have 3yrs accounts the lenders I've dealt with are fine with it.

They do tend to look at your statements and ask questions though. If you paid yourself a monthly divi, similar amount at the end of each month it would look better for them. Then end of year pay yourself a final divi

[Eric Mc]

Although HMRC may not be too impressed with monthly dividends.

[steve2]

Eric Mc said:

Although HMRC may not be too impressed with monthly dividends.

that has never been a problem with us, limited company paying the same dividend each month for quite a few years now

[NightDriver]

Eric Mc said:

Although HMRC may not be too impressed with monthly dividends.

Interesting... I raised this exact issue with my accountant about 6 months ago. He assured me there were no rules as to how often or at what frequency dividends are paid and so it should be of no interest to HMRC. They will just look at the total value dividends paid over period rather than in what amounts have been paid.

Is this incorrect? I think I will give hima a call this morning to discuss again - things like this get me worried!

As for the OP. I've never had a problem with mortgages, but always worth going through a specialist broker as they will better understand your situation and can arrange the application accordingly.

[Eric Mc]

NightDriver said:

Interesting... I raised this exact issue with my accountant about 6 months ago. He assured me there were no rules as to how often or at what frequency dividends are paid and so it should be of no interest to HMRC. They will just look at the total value dividends paid over period rather than in what amounts have been paid.

Is this incorrect? I think I will give hima a call this morning to discuss again - things like this get me worried!

As for the OP. I've never had a problem with mortgages, but always worth going through a specialist broker as they will better understand your situation and can arrange the application accordingly.

It is not a HIGH risk practice but there is SOME risk in paying dividends too frequently.

You are correct that there is no law stating how often dividends should be paid. But as you should all realise, tax is as much about interpretation as it is about legal exactitude.

The risk with frequent dividends relates to PAYE and NIC regulations rather than (say) Corporation Tax and/or Self Assessment.

A dividend is NOT remuneration to a director. It is a distribution of available reserves or profits to shareholders.

Frequent payments (such as monthly payments) CAN be interpreted by HMRC as regular remuneration amounts rather than profit distributions. If this happens, HMRC can, in theory, insist that the amounts that were thought to be dividends be recalculated as Net Salary and the correct PAYE and NIC (Employee's and Employer's) be calculated on the amounts paid to the directors/shareholders.

To ensure that a payment can be properly interpreted as a dividend, a number of steps should be taken BEFORE each payment is made -

a set of management accounts should be available for review before the dividend amount is decided on

a meeting of the directors should be held to decide on the dividend level

minutes of that meeting should be kept on file

a proper dividend voucher should be raised and kept on file for each dividend paid

If the above steps are taken, then even monthly payments run less risk of being examined closely by a Tax Inspector.

In recent years, such payments have not been exposed to the scrutiny that they may once have been. This is not because the rules have changed. It's more to do with the fact that HMRC do not have the resources any more to do their job properly.

[steve2]

thanks for that information Eric, will have to have a word with our accountant as we both take the same amount each month in dividends !!

[FlyInMySoup]

Eric Mc said:

Frequent payments (such as monthly payments) CAN be interpreted by HMRC as regular remuneration amounts rather than profit distributions. If this happens, HMRC can, in theory, insist that the amounts that were thought to be dividends be recalculated as Net Salary and the correct PAYE and NIC (Employee's and Employer's) be calculated on the amounts paid to the directors/shareholders.

I assume that if HMRC were to recalculate dividend payments as Net salary as you describe there would have to be a refund of corporation tax paid? This, I think, could end up being close to cash neutral so perhaps makes it unattractive for them to pursue.

[Eric Mc]

That could happen but it's the National Insurance amounts that they really are after - which can make it worthwhile for them.

And there is also the principal at stake too. HMRC do not only pursue a point purely based on how advantage it might be for them.