dividend take home vs PAYE takehome

OceansX1

I was hoping someone could help with some confusion i have after speeking to a broker for limited companies director mortgage.

I am a 50% shareholder of a limited company, and have recently filed my personal tax return upto the higher tax band of £50,000.

My wife is PAYE and earns £33,000 a year.

We have been told we can borrow a mutliple of 4.5x both our earnings. Where i am confused is the PAYE is multiplied before tax, and so are the dividends, but the take home difference between PAYE and dividends is substatially different.

As an example: my take home pay on £50,000 ( £8,628 salary/ £41,372 dividends) is £47,337.50. If i were to take this home on PAYE my wage would be roughly £67,000.

Why dont the banks do the multiple on take home? I must be missing something.

dunstonh

Whilst you are not self employed, lenders treat you as if you are and use a system that is similar to self employed.
The lenders will consider your salary, dividends and retained profits.  

Why dont the banks do the multiple on take home?

Different taxation and it would be artificial as many limited company shareholding directors control how much they "take home" for tax reasons.  So, it would be unfair to penalise them when they are in a far healthier position that a director leaving no retained profits in the business.    

You could also manipulate your take home to boost the multiple if they did not consider all things.

The trend is another thing that is important.  i.e how is the business trending over 3 years.

amnblog

The Lender does not simply multiply any of your income. The affordability calculation is far more complex than that.

OceansX1

I apreciate that amnblog im just trying to understand why the general calculation is done on dividends before tax and not take home as i could pay myself a much larger Paye amount and take home the same figure, but end up being able to borrow a lot more. (Subject to affordabilty) I do have retained profit in the business year on year but the broker i spoke to said a mortgage based on net profit was not available to me because im not the only shareholder. He did say it would be possibe if the other sharholder was my wife?? Im asuming thats because all sharholders would need to agree on release of the retained profits for the afordabilty to be acurate. 

[Deleted User]

OceansX1 said:

I apreciate that amnblog im just trying to understand why the general calculation is done on dividends before tax and not take home as i could pay myself a much larger Paye amount and take home the same figure, but end up being able to borrow a lot more. (Subject to affordabilty) I do have retained profit in the business year on year but the broker i spoke to said a mortgage based on net profit was not available to me because im not the only shareholder. He did say it would be possibe if the other sharholder was my wife?? Im asuming thats because all sharholders would need to agree on release of the retained profits for the afordabilty to be acurate. 

Salary + Share of Net Profit (before or after corporation tax depending on lender) is a fairly common calculation.  I think Metro need all directors to be named on the mortgage but its certainly not a rule across the board.  I know I did one recently with a 50/50 Ltd company with 2 friends and only 1 was on the mortgage.

The original question of why is it calculated that way can be extended to lots of different things if you really started to think about it.  Here are a few strange ones:

• ignoring season ticket loans on payslips and use gross pay even if there is a £500 deduction from this for season ticket loan
• NHS and Police Pensions have quite large contributions in comparisons to some paye occupations yet the affordability is done on gross pay regardless
• Used to be a lender who would ignore childcare costs from affordability

Affordability models are complex and change quite frequently.   Its not unique to self employment though. Each lender views cases differently.   I had a case the other day with £270k difference in borrowing between the top lender and the 20th.  

Also, some lenders do work on net pay that overrides the multiples

OceansX1

Thanks Deleted_User.  I think i better start talking to a new broker??

Grumpy_chap

Lenders will use your SA302 as the basis to determine lending limit.

[Deleted User]

Grumpy_chap said:

Lenders will use your SA302 as the basis to determine lending limit.

No they wont.  They will use a variety of factors to determine a lending limit.  The SA302 is merely 1 method that lenders can use to prove an income being declared.  

amnblog

OceansXI, sounds like your Broker does not understand Limited Company underwriting.

You do not have to be the only shareholder to have profit (rather than dividends) considered. Nor does your wife’s have to be the other shareholder.

Speak to a broker experienced in this area.