Company Director on PAYE

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Company Director on PAYE

Company Director on PAYE

Joanne Markham talks us through the mortgage process for company directors 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.

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We’re there to help. There are no silly questions – we like people to ask us about anything and everything that might be going through their mind. 

How much can I borrow and what deposit will I need as a company director on Pay As You Earn?

It’s exactly the same as what you could borrow if you’re fully on PAYE and employed by a company. Lenders use income multiplications to calculate the loan.

If you earn up to £75,000 they might multiply your income by 4.49. If you earn more than that they might multiply it by five. Any commitments come off that total – your car loans or credit cards etc. The calculator works the same for all applicants.

It’s more about how we get to the figure that you can borrow – the average of your last two years’ income – or the lower of the latest.

It’s exactly the same with the deposit. You can put a 5% deposit down in theory, but you will need a good credit record. You’re a higher risk if you only put 5% down.

If you’re buying a £200,000 house and only putting in £10,000, you’re borrowing 95% Loan to Value. If you can put a bigger deposit down, not only would the rates be better, but you’re a lower risk. You won’t be credit scored as harshly behind the scenes.

Can I get a mortgage as a company director on PAYE if my accountant is working to minimise tax?

There are a couple of ways you can use your income. Some people don’t take a massive profit as salary and dividends. They leave it in the company, because with a limited company you’ve got corporation tax as well as personal tax. By not taking it out, you’re not paying your personal tax on it – and if you don’t need it there’s no point in taking it out.

We do have lenders that will take your average net profit plus your pay as you earn income. Perhaps you take £9000 per year from a company on PAYE and just take a small dividend of say £10,000 – but you want a big mortgage.

If your company is making plenty of profit, but you don’t need to take the income out and pay tax, we can use that net profit within the business. Say there’s £80,000 there from last year and £70,000 from the year before, lenders will use the average of those two years.

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

Absolutely. Some lenders for Buy to Let mortgages don’t require any income. You’re not treated any differently to somebody that is employed full time.

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

Bad credit does have an effect on the rates you can get and the lenders we can approach. High street lenders won’t be available to you, depending on what the credit issue is.

If you’ve ignored a £200 parking ticket, all of a sudden there could be a CCJ on your credit file. Certain lenders will discount amounts under £300 or £250.

But you have to get past the system. If it’s looking for a minimum score but that CCJ has brought you under it, the computer still says no. We then have to look at subprime lenders which don’t predominantly credit score. They’ll look at your case as a whole – but because of that, you will pay much higher rates and you might need more deposit.

So it is possible. It’s very rare that we can’t do something, but it might be that we have to go to a subprime lender.

How does remortgaging work as a company director on PAYE?

We go through exactly the same process as if you were purchasing – full affordability checks and credit scoring, bank statements and a full application.

But if you’re staying with your own lender on a new deal, and you don’t want to borrow more or change the term, there’ll be no checks from the lender.

We still have due diligence and compliance to complete to make sure we’re giving you the right advice, but you’re not treated any differently. It’s just about calculating your income – that’s the only real difference.

How can a mortgage broker help a company director on PAYE?

It always pays to pick up the phone – don’t be afraid! Don’t assume that if you have a £200,000 mortgage you need to stay with your lender because you don’t take much out of the business or can’t prove your earnings.

We’ve got lenders that will not not necessarily look at what you’re taken out every month, but how the business is doing.

Or, you could be a small shareholder and not realise that they’ll take you on your PAYE. So pick up the phone and give an overview of your situation to a broker.

Most people will go straight to their own bank – but every lender has different criteria, especially with the self-employed. But as a broker we have that knowledge of which lender would be more suitable.

If you’re told no by your lender, you can automatically think it’s not doable. But a broker can quite literally be life changing – it’s great to be able to say, yes, we can do that.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH REPAYMENTS ON YOUR MORTGAGE.

MOST BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.

Approved by The Openwork Partnership on 25/6/2024

Company Director on PAYE

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