Most lenders assess a limited company director on salary plus dividends drawn. A smaller group assess on salary plus their share of net profit retained in the business. For a director who deliberately leaves money in the company, the second approach can produce a dramatically larger borrowing figure on identical accounts.
This is the single most valuable thing a director can know before applying for a mortgage.
The two approaches
Salary plus dividends. The lender adds the salary you paid yourself to the dividends you actually drew. Anything left in the company is ignored entirely.
Salary plus retained profit. The lender adds your salary to your percentage share of the company's net profit after corporation tax — whether or not you drew it.
Both are legitimate. They simply answer different questions. The first asks what you took out. The second asks what the business earned on your behalf.
Why the difference is so large
Directors commonly draw a modest salary and take limited dividends, leaving profit in the business — for tax efficiency, for working capital, or to fund growth.
Assessed on drawn income, that director looks like a modest earner. Assessed on retained profit, the same director looks like what they actually are.
The prudent behaviour — leaving money in the business rather than extracting it — is precisely what penalises you under the first method. Directors are frequently punished, in borrowing terms, for running their company sensibly.
Which lenders do it
Not the majority, but enough to matter, and it includes some mainstream names as well as specialists. The specifics vary:
- Some use your percentage shareholding applied to net profit
- Some require you to be a significant shareholder, often 20% or 25% minimum
- Some use profit before corporation tax, others after
- Some average two years; some use the latest year if the trend is upward
- Some will combine dividends drawn and retained profit; others treat them as alternatives
These differences are not trivial. Two lenders both willing to use retained profit can still produce noticeably different figures on the same accounts.
What you will need
- Two to three years of full company accounts, prepared by a qualified accountant
- Your SA302s and tax year overviews, matching
- Confirmation of your shareholding percentage
- Recent management accounts if the current year is materially better
- Business and personal bank statements
Your accountant will likely be contacted directly. Tell them in advance — a prompt, clear response speeds things up considerably.
Practical points that improve the outcome
Do not suddenly increase your dividends before applying. It is tempting, and it usually backfires. Lenders compare drawings against the accounts, and a spike immediately before an application invites questions. It can also create a tax bill that outweighs any mortgage benefit.
Time it around your year end. If your latest year is your strongest, apply once those accounts are finalised. If the current year is trading substantially better, waiting for it may be worth far more than any difference in rate.
Be ready to explain a dip. If profit fell, a short written explanation from your accountant — a one-off investment, a lost contract since replaced, deliberate reinvestment — genuinely helps. Lenders that assess manually will read it.
Directors' loan accounts need explaining. An overdrawn director's loan account raises questions. Have the position clear before you apply.
Multiple directors
Where a company has several directors, most lenders will use your shareholding percentage to apportion the profit.
If shareholdings do not reflect how the business is actually run — a 50/50 split where one director does most of the work, for example — that is worth discussing with your accountant well before a mortgage application. It is not something to change hastily, and lenders will look at the history rather than the position as of last week.
What about a director's salary that is deliberately low?
A related quirk worth naming.
Many directors pay themselves a small salary, often set around the threshold that preserves National Insurance credits without triggering much liability, and take the rest as dividends. It is standard practice and entirely legitimate.
The problem arises with lenders that assess salary only — a small number do, particularly for certain products — because such a director appears to earn very little indeed.
If you encounter a lender treating you as a low earner, that is a signal about the lender's method rather than about your finances. It is not something to fix by changing how you pay yourself shortly before applying, which creates tax consequences and looks contrived. It is something to fix by using a different lender.
The point to take away
If you are a director and your bank has offered you a borrowing figure that seems low relative to what your business earns, do not accept it as the market's answer. It is one lender's answer, using the less favourable of two legitimate methods.
Call 0116 277 7536 or see self employed mortgages in Leicester.
More guides: self employed guides for Leicester.
