Company director - how much to take in dividends

theburningcat

I am a company director and 50% shareholder. My wife is also a director and a 50% shareholder. We are looking to buy our first house in roughly August 2019. We have roughly £40k for a deposit, maybe a bit more. I don't know how much we're going to want to spend on a house but I would guess £300k-ish.

In the 17-18 tax year, my total income was £41k, of which about £33k was dividends. I'm trying to get the exact figure for my wife (she doesn't keep anything :mad:) but I think it was something like £25k of which £17k was dividends.

Our accountant is in the process of preparing our 18-19 annual accounts and figuring out our dividends. She knows that we're looking to apply for a mortgage and has asked us what we'd like to take in dividends. We have £59k is reserves to split between us.

I've heard anecdotally that a mortgage lender would like to see 2 years of roughly equivalent income between us. Does anyone have any knowledge on what would look best to most lenders? Should we take the same as last year plus 3%-ish for inflation? The whole £59k?

ACG

General rule of thumb is lenders will average out the last 2 years figures.

If you are looking for a mortgage of £260k that would mean you need to have a combined income average out at around£55-60k - that is based on quite a few assumptions however (age, credit, affordability, kids and so on).

There are also lenders who will off retained profits, so you do not need to take the money out of the business as such.

theburningcat

Thanks ACG. Since you mention kids, am I right in thinking that it would be better if our first is born just after we buy our first house than just before?

ironmanjason

theburningcat wrote: »

Thanks ACG. Since you mention kids, am I right in thinking that it would be better if our first is born just after we buy our first house than just before?

Yes it is easier more than financially for mortgage it is easy when you find a nice house .. move in.. and settle and then have the kid rather than having to go view properties with a new born

As for accounts we had less than 2 years (1 year 9 months) so our options for mortgage were limited but there are a few banks which take 1 year account as fixed term contractor.. this is what I was advised by multiple MA with who I spoke.. our application is still in progress so I am hoping it should be ok..

dunstonh

Our accountant is in the process of preparing our 18-19 annual accounts and figuring out our dividends.

are you asking the accountant how much you can draw from the business? (a strange thing to do).

Normally, you are told to draw a salary to the primary threshold and then pay yourself dividends for any amount above that. The accountant doesnt need to work anything out for you then.

In the 17-18 tax year, my total income was £41k, of which about £33k was dividends. I'm trying to get the exact figure for my wife (she doesn't keep anything ) but I think it was something like £25k of which £17k was dividends.

If you have 50/50 shareholding then the dividends should be the same for both of you. Unless you have different share classes (happens but not common).

am I right in thinking that it would be better if our first is born just after we buy our first house than just before?

Children eat money. Owning a house eats money. So, it would be better to wait until you understand the house bills and any work the house will need doing on it before you introduce another cost.

I've heard anecdotally that a mortgage lender would like to see 2 years of roughly equivalent income between us.

Some want three and want net profit to trending upwards. So, the longer the better. Two is possible but you start restricting lenders.

Some lenders will take into account retained profits and the net profit is their primary concern and not care as much about the salary and dividend. The one area lenders are not good with is pension contributions. You are probably paying around £5000 a year into a pension with those figures. That reduces your net profit. The fact you can stop pension contributions at any time is not accepted by lenders.

theburningcat

Normally, you are told to draw a salary to the primary threshold and then pay yourself dividends for any amount above that. The accountant doesnt need to work anything out for you then.

That is what we've been told. The question is just whether we should leave some of our profit in the company as retained earnings.

If you have 50/50 shareholding then the dividends should be the same for both of you. Unless you have different share classes (happens but not common).

We have different share classes.

Children eat money. Owning a house eats money. So, it would be better to wait until you understand the house bills and any work the house will need doing on it before you introduce another cost.

My question was just what would be preferable in terms of our mortgage application. I know there are "real life" factors to consider as well.

You are probably paying around £5000 a year into a pension with those figures

It's nothing like that. We only pay the standard contribution on our wages, which is peanuts.

theburningcat

Also, I know there are a lot of variables, but for argument's sake, if we have 2 years accounts (only) and £41k + £25k (£66k between us) for both of those years, and if we're first time buyers with a £40k deposit, looking to buy a £300k property, what sort of mortgages might be available to us? I assume the best ones will be out of reach but that we also won't be seen as high risk?

dunstonh

We have different share classes.

That is something the lenders will need to know. Its less common for different share classes on small businesses (spouses) as it can be a bit of a red flag for HMRC when it comes to deciding which firms to look at. Which is why most husband and wife firms dont do it.

It's nothing like that. We only pay the standard contribution on our wages, which is peanuts.

There is no standard contribution on pensions for a husband and wife directorship. Auto-enrolment, in case that is what you are referring to, only applies if you have employees. If its just you and your wife then auto-enrolment is not something you have to worry about. (getting OT I know).

That is what we've been told. The question is just whether we should leave some of our profit in the company as retained earnings.

Retained profits wont be an issue with enough mainstream lenders. I'm in a chain about to move and our mortgage application asked for retained profits as ours increase each year as I focus on tax efficiency and didnt need the income. The lender, asked for the turnover, gross profit, net profit (after tax, before dividends), retained earnings, salary and dividend.

They wanted to know the shareholding split and if different share classes existed. So, whilst you say 50/50, the different share classes will be something you have to cover off as earnings are clearly not 50/50.