Company Director on PAYE

Podcast approved by The Openwork Partnership on 25/6/2024.

What is a company director on PAYE, and can a company director on PAYE get a mortgage?

Being a company director on PAYE is just the same as being employed. Most directors are employed by their own company. And yes, a company director can get a mortgage based just on those earnings – but there are quite a few different scenarios to this.

Usually when you’re a director of your own limited company – not a sole trader – you take a wage from the business. It’s not usually a massive wage, but it’s topped up by dividends from the profit of your company. As we go through the questions I’ll break down how it works in more detail.

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

Yes, you can. You’re self-employed, so it’s going to be a little bit harder and not as many lenders will be available to you – but this is where a broker comes in.

We have the knowledge about lenders’ criteria. They might reduce the Loan to Value, which means you need to put a bigger deposit down. Lenders will want bank statements to see how your business is running – because you’ll be in the second year at that point.

They ideally want you to come from a background within that same industry. Like myself as a mortgage broker, if I was employed and then went self-employed a lot of lenders will be happy with that, as there’s a proven track record.

But if you’re going from being a builder to a mortgage broker, you’re probably going to trip up because you’ve not got that experience. It’s always subject to underwriter review. I’d also say that having an accountant is a must for you because lenders often want an accountant’s reference to share your projections for the following year.

On your bank statements, they’re looking for sustainable earnings. If you have earned £40,000 in your first year, the last three months’ bank statements will ideally show you’re earning a similar amount – so 25% of that £40,000 or more.

What is the difference between PAYE and a limited company in how it affects the mortgage process?

In your limited company there could be quite a few directors with different shareholdings adding up to 100%. As a rule you would all take an income through Pay As You Earn.

Then, depending on how well the company is doing you would take a dividend, which is a share of profit. So if you own a 50% share in the company you’d end up with a 50% share of the profit.

Lenders usually view someone with up to a 20% to 25% shareholding as being employed by that company. They will just use your PAYE income. But if you are the sole owner of the business or a bigger shareholder, they will then take your PAYE plus any dividends.

So if you have a 100% share in your company you’re always going to be treated as self-employed. If you have been made a director of a company with a 5% shareholding, they will treat you as employed.

This can be complex, so if you’re unsure, get in touch. I’d just ask a few questions to find out you run the company, how it’s owned and who’s involved. I’d then know straight away how lenders would treat your income.

There are lots of different scenarios with regard to self-employed sole traders, limited companies and whether you have just one year’s accounts or more.

How will lenders assess my income as a company director on Pay As You Earn?

They start by looking at the PAYE. Perhaps you’ve earned £10,000 through PAYE and you’ve taken a £30,000 dividend this year. The previous year you’ve taken £9,000 on PAYE and a £25,000 dividend – as long as you’re increasing in profit like this, they take the last two years pay plus dividends and average them.

If you’ve got a decreasing profit for some reason, with a good explanation, they will take the lower of the two years. They won’t average it.

What documents do I need to prepare? What if my pay slips are not considered as PAYE income?

Even if you’re a 100% shareholder, you should be producing a pay slip every month for yourself. If that pay slip says you earn £800 a month through PAYE but there’s a dividend to top that up, lenders won’t be looking to match that pay slip going into your bank account.
They know that there’s a dividend in there too.

They will look at a combination of bank statements, tax calculations or full accounts. A tax calculation is basically a summary of everything you’ve earned.

If you are a company director it will show income from employment and dividends. It’ll show them separately and as a total. You get a summary for each year, and that tax calculation is accompanied by something called a tax year overview. That matches up the tax and national insurance payable for that particular year, if it’s been paid.

So the documents you need are the last three to six months’ bank statements, your last two years’ tax calculations and tax year overviews, plus your full accounts.