Running a profitable limited company does not always produce a straightforward mortgage income figure.
Many business owners take a salary and dividends while leaving part of the profit within the company for working capital, future investment or financial resilience. As a result, the personal income shown on a tax return may represent only part of the wider financial picture.
Lenders do not all assess this position in the same way. Some use salary and dividends, while others may consider salary together with the applicant’s share of company profit.
Understanding these different calculations can help you approach a lender whose criteria reflect the way your business is structured.
At a glance
- Many lenders assess limited company income using salary and dividends.
- Some lenders may use salary together with your share of company profit.
- The relevant profit figure is not the same as accumulated retained earnings.
- Your shareholding, trading history and recent business performance can all affect the assessment.
- The lender may also consider liquidity, financial commitments and whether the profit appears sustainable.
- Document requirements vary, so two years of accounts should not be presented as a universal rule.
Why salary and dividends may not show the full picture
A business owner may choose to take a relatively modest salary and dividends while leaving additional funds in the company.
This can be done for several reasons, including:
- Maintaining working capital
- Funding future investment
- Purchasing equipment
- Managing seasonal cash flow
- Supporting future business plans
- Following tax advice from an accountant
A lender using only salary and dividends will base its affordability calculation on the income taken personally.
That approach may be appropriate for some applicants. However, it may not reflect the full position of a profitable business where the owner has deliberately left funds within the company.
This does not mean that all company profit can automatically be treated as personal income.
The lender must still decide whether the relevant profit is attributable to the applicant, sustainable and available without weakening the business.
How lenders may assess limited company income
There are two common assessment methods, although individual criteria vary.
Salary and dividends
Many lenders use the salary and dividends received by the applicant.
Depending on the lender, the calculation may use:
- The latest year’s figures
- An average of the latest two years
- The lower of the latest year and a two-year average
- Another calculation where income has increased or declined
This method focuses on income already taken from the company and usually evidenced through tax documents, payslips, dividend vouchers or company accounts.
Salary and share of company profit
Some lenders consider the applicant’s salary together with their share of company profit.
The profit figure used will depend on the lender’s definition and accounting requirements. For example, a lender may use the applicant’s share of net profit after corporation tax.
The lender may also consider:
- The applicant’s ownership percentage
- Recent profit trends
- Whether the business has sufficient liquidity
- Existing business borrowing and commitments
- Whether the latest results appear sustainable
- Whether taking the proposed income would weaken the business
This approach is not restricted exclusively to specialist lenders, and it does not necessarily require a fully manual underwriting process. What matters is whether the lender’s published criteria accommodate the applicant’s income structure.
Company profit and retained earnings are not the same
The terms “company profit” and “retained profit” are sometimes used interchangeably, but they do not mean the same thing.
Company profit normally refers to the result for a particular accounting period. Retained earnings are the accumulated profits left in the business over time after tax, dividends and other adjustments.
A lender assessing salary plus a share of company profit will normally use a defined figure from the company accounts. It does not automatically add the entire balance of accumulated retained earnings to the applicant’s income.
Retained earnings may help demonstrate the company’s financial strength, but the lender may also examine whether those funds are genuinely available or needed for:
- Working capital
- Tax liabilities
- Business borrowing
- Planned investment
- Equipment purchases
- Other operational commitments
Information from the company’s accountant may be required to clarify the position.
An illustrative example
Consider a business owner who holds 100% of a limited company.
They receive:
- A salary of £20,000
- Dividends of £30,000
- A company profit figure of £100,000 after corporation tax
A lender using salary and dividends would assess income of £50,000.
A lender whose criteria allow salary plus the applicant’s share of company profit might assess £120,000, subject to its precise definition of profit and its review of the business.
This does not mean that the second lender will automatically offer a mortgage based on a simple income multiple. The final amount will also depend on:
- Personal and business commitments
- Credit history
- Mortgage term
- Deposit and loan-to-value ratio
- The property
- The lender’s affordability calculation
- Full underwriting
The example demonstrates how the income figure can change not a guaranteed borrowing outcome.
What else will the lender review?
A lender considering company profit will usually look beyond one number in the accounts.
Ownership
The lender will establish how much of the company you own and what proportion of the relevant profit is attributable to you.
A minority shareholder may be assessed differently from a controlling owner.
Trading history
Some lenders normally request two years of figures. Others may consider one full year of trading in suitable circumstances or recognise continuity following a change in business structure.
The requirement depends on the lender and the wider strength of the application.
Recent performance
Growing profit can strengthen an application, but the lender may ask whether that growth is credible and likely to continue.
Where profit has fallen, the lender may use the latest lower figure and request an explanation.
Liquidity and balance-sheet strength
A profitable company can still experience cash-flow pressure. The lender may review whether the company has sufficient cash and working capital to meet its commitments.
Business borrowing
Loans, leases, tax liabilities and other business commitments may affect the lender’s view of sustainability.
Personal guarantees may also need to be disclosed.
Director’s loan account
The lender may review whether the business owes money to the applicant or whether the applicant owes money to the company.
The treatment will depend on the balance, the circumstances and the lender’s criteria.
A practical example for dental professionals
Dental professionals who trade through limited companies can encounter the same issue.
An associate dentist or practice owner may leave funds within the company to support:
- Tax liabilities
- Equipment purchases
- Technology upgrades
- Practice refurbishment
- Staff and laboratory costs
- Future investment
A salary-and-dividends assessment may not reflect the wider profitability of the business.
Depending on the working structure and lender criteria, the evidence may include:
- Finalised company accounts
- Salary and dividend records
- SA302 tax calculations and Tax Year Overviews
- Associate pay schedules
- Business bank statements
- Associate or practice agreements
- Confirmation from the accountant
A lender familiar with dental income may also need to understand NHS payments, private fee income, capitation arrangements and the costs associated with running the practice.
Documents you may need
The evidence required will depend on the lender, but it may include:
- Finalised company accounts
- SA302 tax calculations
- Tax Year Overviews
- Payslips and P60s
- Dividend vouchers
- Company tax returns, where requested
- Business bank statements
- Details of your shareholding
- An accountant’s certificate or reference
- Information about business borrowing
- Details of the director’s loan account
Draft accounts and projections are not accepted by every lender. If the latest accounts have not been finalised, this may affect which options are available.
Providing more documents than requested does not necessarily improve an application. The aim is to supply clear, consistent evidence that supports the calculation being used.
Speak to your accountant before changing your income
Do not increase salary or dividends solely to support a mortgage application without first speaking to your accountant.
Changing the way you take income can have tax, cash-flow and business-planning consequences. It may also be unnecessary if a suitable lender can assess the existing company figures.
Mortgage advice and tax advice are separate. Your mortgage adviser can explain lender criteria, while your accountant can advise on the financial and tax implications of changing how income
is taken.
How Sarah Grace Mortgages can help
Sarah Grace Mortgages has more than 30 years’ combined experience helping business owners and professionals understand how lenders may assess their income.
We can:
- Review your salary, dividends, ownership and company figures
- Compare different lender calculation methods
- Identify lenders whose criteria suit your business structure
- Explain what financial evidence may be required
- Coordinate with your accountant where clarification is needed
- Help present the application clearly and consistently
- Keep you, your estate agent and your solicitor updated throughout the application
Frequently asked questions
Do all lenders use company profit?
No. Many lenders use salary and dividends. Others may consider salary together with the applicant’s share of company profit.
The calculation and evidence requirements depend on the lender.
Is retained profit treated as personal income?
Not automatically.
A lender may use a defined company-profit figure when assessing affordability. Accumulated retained earnings can help demonstrate financial strength, but they are not simply added to personal income.
How many years of accounts will I need?
There is no universal requirement.
Many lenders normally request two years of figures, while some may consider one full year of accounts in suitable circumstances. The lender may also recognise continuity where an established business has changed its legal structure.
What happens if the latest profit is lower?
The lender may use the latest lower figure rather than an average. It may also ask why profits have fallen and whether the change is temporary or likely to continue.
A clear explanation does not guarantee that a higher figure will be accepted, but it can help the lender understand the accounts.
Can a dental professional use a company-profit assessment?
Potentially.
The appropriate calculation will depend on the dentist’s working structure, company ownership, available accounts and the lender’s criteria.
Will using company profit for affordability create a tax liability?
The affordability calculation itself does not require you to withdraw additional funds from the company.
However, mortgage advice is not tax advice. Speak to your accountant before making any change to salary, dividends or company payments.
What if I have only one year of accounts?
Some lenders may consider an application with one full year of finalised accounts, particularly
where there is relevant previous experience or continuity in the same occupation.
Other lenders will require a longer history. The wider application and evidence will also be considered.
Take the next step
Before making an offer on a property, speak to us about how lenders may assess your business
income, which criteria may suit your circumstances and what documentation you are likely to need.
Call us on 0203 6333 888 or book a free initial consultation.
Important information
Your home may be repossessed if you do not keep up repayments on your mortgage.
This article provides general information only and does not constitute personalised mortgage, tax or accounting advice. Mortgage availability and the amount you can borrow will depend on your circumstances, credit profile, property, valuation, lender criteria and full underwriting.
Sarah Grace Mortgages Limited is authorised and regulated by the Financial Conduct Authority.
FCA reference number 771962.
Registered in England and Wales. Company number 09839864.
