Salary and dividends vs salary and net profit: how lenders assess director income
As a limited company director, the way you draw income — typically a combination of salary and dividends — is both tax-efficient and entirely standard. When it comes to a ltd company director mortgage, however, it is important to understand how mortgage lenders assess this income, as the method they use can significantly affect your borrowing capacity.
The two main approaches lenders take to a director salary and dividend mortgage are: assessing salary and dividends combined or assessing salary and net company profits. Understanding which approach applies to your situation is the key to getting the right outcome.
How specialist lenders assess director income
Salary + dividends combined
For a dividend income mortgage UK, most lenders will assess salary and dividends from the tax calculations on file. They will typically take an average of the latest two years declared salary and dividends. For example: if salary and dividends combined to £90,000 in year one and £110,000 in year two, the lender would work from a £100,000 income figure. This is the standard approach used across mainstream and specialist lenders.
Salary and net profit
Some lenders — typically those with more flexible underwriting — will assess salary alongside the company’s net profit rather than using dividends as declared. This approach, sometimes called a retained profit mortgage UK route, is particularly useful for directors who retain profit within the company for tax efficiency rather than drawing it as dividends. Net profit assessment can produce a higher income figure for borrowing purposes, depending on how the company is structured. London FS will advise on which method works in your favour.
Two-year average
Most lenders will want to see your latest two years of tax calculations and company accounts. They will typically average the two years to arrive at your assessed income. London FS will know which lenders offer the most favourable treatment based on your specific income trajectory. Once you understand your assessed income, our income and expenditure calculator can help you map your monthly affordability before approaching a lender.
One year of accounts — is it possible?
Generally most lenders require 2 years of trading history. However, a small number of specialist lenders will consider applications from directors with just 12 months of accounts, or using the latest year’s figures, particularly where income is strong, the business sector is stable, and the director has a professional background (accountant, solicitor, doctor, engineer).
What documents do you need?
- 2 years tax calculations (previously called SA302 forms) and tax year overviews — available from HMRC online or from your accountant
- 2 years company accounts (prepared by a qualified accountant)
- 3 months personal bank statements
- 3 months business bank statements
- Confirmation of company ownership percentage
- Accountant’s reference letter (some lenders require this)
Case study: what the right lender means in practice
Example Ltd company director · 100% owner · two years accounts and tax calculations available
- Year 1: £12,570 salary + £80,000 dividends = £92,570 declared income
- Year 2: £12,570 salary + £94,860 dividends = £107,430 declared income
- Two-year average: £100,000
Method 1 — Salary + dividends: The lender averages the two years of declared salary and dividends. Assessed income: £100,000.
Method 2 — Salary + net profit: Some lenders will use the company’s net profit alongside the salary, rather than the dividends drawn. If the net profit in year 2 was £110,000, those lenders would work from a higher figure. This is particularly relevant for directors who retain profit in the business rather than drawing it all as dividends — in those cases, the net profit method can produce a more favourable outcome.
London FS will run both calculations and advise which approach works best for your individual profile.
