Mortgage for owners of a limited company

CG2017

Hello,

I am just looking for some general advice please. We have a mortgage at the moment - after recent valuation and mortgage statement we have about £100,000 equity in our property.

We are looking at making plans to move in the near future but I know that getting the mortgage we want is more difficult based on our employment. In a couple of years time we would like to buy a house valued at around £350,000 so we have worked out the following.

£100,000 equity
less £10,000 moving fees
less £25,000 to invest in property (as we want to buy a house to 'do up')
less £65,000 deposit

Leaving a mortgage of £285,000

We pay ourselves a salary of £11,000.00 per annum each
I have worked out to get a mortgage for £285,000 we would need to top up our salary with a dividend of £35,000 per annum (£11,000 x 2 = £22,000 + dividend £35,000 x 5 = £285,000)

Can i ask if this is the correct formula - I know going through a mortgage broker we can access lenders who would lend up to 5 x the amount of our income, and it would be an average over 2 years. We just want to plan something we can work towards in terms of growing our business and getting a mortgage that we want in a couple of years time.

Thank you in advance!

ACG

Personally, I would work to the tune of 4.5x income.
You are right, that there are lenders who will do 5xincome or even more, but they are few a far between so if they decline you you may struggle.

However, there are also lenders who will work of PAYE + net profit, which is usually more than PAYE + dividends - so that might help?

amnblog

You DO NOT need to pay yourselves dividends in order to obtain a mortgage, nor should you do so.

We always tell our clients to make decision about their business and their taxation for business and taxation reasons - not for mortgage reasons. What happens if you pay tax on a dividends payment now solely to obtain a mortgage and then the Lender's mortgage criteria changes before you apply?

As ACG says, some lenders will work on PAYE and profit.

Therefore engaging a broker is likely to be less expensive than paying tax on a dividend.

CG2017

Thank you so much for your helpful and quick responses!

Do mortgage lenders then use profit of a business in the same way as they do dividend, so we would aim for circa £35k profit rather than so much of a dividend per year? However am i correct in thinking we pay more tax on profit (currently 20%) than we do on dividends (currently 7.5% over 5K) It feels like its difficult to benefit both the business and our personal situation - if that makes sense?

I will recalculate and base it on 4.5% also as its always good to go on the lower.

amnblog

You pay corporation tax on your profit regardless of whether you take it out as dividend.

You do not make a 12.5% (20% - 7.5%) saving on your tax bill by taking dividends [if only].

You need a conversation with your Accountant.

dunstonh

The most common method for directors is for them to be paid a salary to the primary threshold (£8164pa - £680pm) and then take dividends on the amounts above that. That means you pay no NI or income tax on salary. The dividends get a £5000 personal tax-free allowance of their own.

By taking a salary, you are paying NI when you do not need to. However, the savings at this low level of drawing are not likely to be significant.

If you plan to take more, you should speak with the accountant

CG2017

Thanks everyone

Yes we do pay ourselves the minimum salary of £11k each per year, the top up our monthly income with a dividend, I know the threshold will be £5k allowance each per year tax free so i guess its just after those thresholds, how do we top up our income so I will speak to our accountant.

Thank you!

amnblog

5K this year and last only

We all got screwed after that.

ACG

amnblog wrote: »

5K this year and last only

We all got screwed after that.

I went limited, 3 weeks later they decided to cap dividends at £5k tax free. My accountant benefited from me going limited and so has the government.

amnblog

Next year it drops to £2K does it not.

Basically they took most the financial benefit out and left the cost in.

Wont be long before they remove the risk benefit (unless you are multi -billion and making contributions to the party in Government)

ACG

amnblog wrote: »

Next year it drops to £2K does it not.

Basically they took most the financial benefit out and left the cost in.

Wont be long before they remove the risk benefit (unless you are multi -billion and making contributions to the party in Government)

At least I am entitled to all of the same benefits as someone who is employed, oh hang on....SMP, statutory redundancy pay - pretty sure neither of those are open to me, despite paying the same tax rates as everyone else. Not that I am bitter about it.