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Increasing Personal Income for Mortgage

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Speaking for my own position here as opposed to my practice clients- I’ve been only been drawing a modest amount out of my limited company each year (personal allowance + dividend allowance) as I haven’t particularly needed any more, and letting excess cash just build up in the company.

I will be applying for a mortgage with my wife, say in two years, and am concerned that although there is enough money being earned and retained in the company, our combined personal earnings on paper may not look high enough, due to my personal earnings only being the personal allowance + dividend allowance. 

I’m considering adding my (director and shareholder) wife who is a basic rate taxpayer and also employed elsewhere onto the company payroll at £8,424 per year. I figure this will only cost 1% in tax (20% PAYE, less 19% corporation tax saved). This is the cheapest way of boosting our combined personal earnings, as anymore salary for me increases employee national insurance at 12% and anymore dividend income for either of us will incur tax at 7.5%.

My worries are:

1. I don’t know if mortgage providers take the profit building up in the company into consideration at all, or if it is based solely on what ends up on the SA302.

2. If I were to put through the additional payroll to boost up our combined SA302 earnings, I don’t know whether the corresponding £8,424 drop in company profit would spook the mortgage provider into thinking there was a problem with the company.

I appreciate it may be more of a question for a mortgage advisor, but I’m not convinced they’d understand the question as well as an accountant. If anyone has any experience of increasing personal income at the expense of company profit for mortgage purposes, I would be most grateful for any thoughts.  

Replies (13)

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By Matrix
28th Aug 2019 23:46

I am sure if you hunt around there will be a lender who looks at the company accounts rather than / in addition to the tax return.

However I have two thoughts on what you are doing if that is ok:

1) Your wife’s salary will not be tax deductible if her duties are not commensurate with her remuneration

2) You are wasting your basic rate band by choosing not to pay tax on dividends at 7.5%. Retained profits will be taxed at a minimum of 10% on future extraction and at today’s very low rates. Unless the amounts are small and covered by the annual dividend allowance for years or the CGT AE on disposal, I don’t really get it.

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Replying to Matrix:
Hallerud at Easter
By DJKL
29th Aug 2019 00:10

I tend to agree- max dividends up to basic rate limit each year, even if funds left in company, and they are then available to help towards buying the next house- my son (I do not act for him) arranges maximum salary/dividends each year from his company for this very purpose though in his case it is to save the house deposit for a first time purchase.

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Replying to Matrix:
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By NH
29th Aug 2019 09:37

on point 2, I agree with Matrix but I suspect that the majority of people faced with a choice between paying 7.5% now or 10% in a number of years would choose the latter option - remember the old saying, "tax postponed is tax saved"

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Replying to NH:
RLI
By lionofludesch
29th Aug 2019 09:58

NH wrote:
..... remember the old saying, "tax postponed is tax saved"

Especially if you're run over by a bus before the tax falls due.

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Replying to NH:
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By Matrix
29th Aug 2019 13:08

It won’t be 10% in a number of years due to the volatile economic and political times in which we live. Also 7.5% is less than 10%, you wouldn’t advise your clients to pay more tax unnecessarily and the money can be invested or used to pay off mortgage if he really can survive on £12k a year.

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By Glenn Martin
29th Aug 2019 09:23

Take more dividends out for the next 2 years to boost your earnings to get the mortgage you want.

Most mortgage companies will just look at what is on your tax return as they don't understand the relationship between the director and the company.

Is it not worth paying some tax to secure your home?

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By Glenn Martin
29th Aug 2019 09:23

Duplicated Sorry

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RLI
By lionofludesch
29th Aug 2019 09:35

I can't see the sense in letting cash build up in the company.

One day you'll want it out (that time seems to be approaching soon) and then you've only got one personal allowance, one dividend allowance and one basic rate band to hoover it up.

Your plan was far too short-term.

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By SXGuy
29th Aug 2019 09:42

I believe Natwest, who I recently switched over mortgages to, looked at my retained earnings from the company to assess what I "could" take as drawings and factored this in when the underwriter looked at it.

However, I also know that a lot of other lenders only care about whats shown on a SA302 and TYO.

That being said, if you have enough retained earnings, and you time your application for a mortgage right, as in, just prior to April, there is no reason why you couldn't declare enough dividends to meet the lenders requirements which would increase the figures on your SA302. Obviously this is dependant on your retained profits, and tax will be due on it.

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Image PN
By Mr Hankey
29th Aug 2019 10:21

Hi everyone, thank you all for the comments, they have been very helpful and I've taken them on board.

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By DSG
30th Aug 2019 09:18

you do not need to increase your drawings at all, lenders like Metro Bank, will lend against profits, before corporate tax, allowing you to procure far more than a mix of salary/dividends would yield; there are other lenders also lending against retained profits and profits after corporate tax, plenty of choices, so avoid the extra tax burden

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By AdShawBPR
04th Sep 2019 10:13

Agree with comments about using your basic rate band as far as possible - and your wife's. As a director (assuming she is a director of your company) I don't see that paying her £8.4k would be controversial.
Also think about going through a mortgage broker. A good one should know which banks are offering the best rate and are smart enough to look at the company's financial position combined with your own.

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7om
By Tom 7000
05th Sep 2019 18:21

The lenders have a form that want the co profit and the DIVS and salary paid. All is taken into account Don't worry on this point

Don't forget the 2k div allowance

If your wife has another job then yes you save 19% ct and she pay 20% IT. But you can claim the employers allowance so put your salary up to 12.5k and suffer 12% NI instead of 19% CT

Remember you can only be paid salary if you actually do some work....

If you are an ACA OR ACCA check the shareholding requirements of the institute. Some only allow say 25% of shares to nonnmembers
In my ooinion You should really pay out all your profits and pay 7.5% tax. If you retain them in the co and pay out in the future you might be on 32.5% HRT...
Or perhaps JC4PM gets in and the tax rate on DIVS is 20% as he has suggested...

I'd be paying up to the 50k HRT level if it was me.

I have a help sheet on all this if you want it... [email protected]

Tom
Www.ttca.co.uk

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