Why directors are often offered less than they expect
Most directors pay themselves in the most tax efficient way: a modest salary, dividends on top, and often some profit left in the company. That makes sense for tax, but a lot of lenders only look at what you've actually drawn, as shown on your tax calculations.
So if the company made £150,000 profit and you took £60,000 out, those lenders will work out your borrowing from £60,000. Other lenders will look at the bigger figure.
How different lenders work it out
- Salary plus dividends. The most common approach, usually averaged over the last two years, or the latest year if it's lower.
- Salary plus your share of net profit. Some lenders use your share of the company's profit after corporation tax instead of the dividends you took. If you've left money in the business, this can increase what you can borrow a lot.
- Latest year only. If your income has gone up, some lenders will use the most recent year rather than an average.
- One year's trading. A smaller number of lenders will consider you once you have one full year of accounts, particularly if you did similar work before.
Which approach suits you depends on your figures, so I'll look at your accounts before recommending anything.
Smaller shareholdings
If you own a small share of the company, many lenders treat you as employed and use your payslips and P60 instead of the company accounts. The cut off is usually somewhere between 20 and 25 per cent, depending on the lender. This often applies to directors of larger businesses and people who've been given shares as part of their package.
Contractors
If you work through your own limited company on a day rate, some lenders will work out your income from your contract rather than your accounts. That can help if you've recently gone contracting or your accounts don't show what you actually earn.
What I'll need from you
- Your last two years' tax calculations (SA302s) and tax year overviews
- Your last two years' company accounts
- Recent personal and business bank statements
- Your accountant's contact details, as some lenders ask them to confirm your income
If you don't have everything to hand, that's fine. A first conversation and your latest accounts are enough for me to tell you roughly where you stand.
