Can contractors use dividends as income proof?

For contractors who operate via a limited company, income is often structured to maximise tax efficiency, typically involving a low basic salary and significant dividends. While this strategy is tax-smart, it can create complexities when applying for mortgages or secured loans, as traditional lenders prefer straightforward, salaried income.

How and When Can Contractors Use Dividends as Income Proof for UK Lending?

The short answer is yes, dividends are a recognised form of income proof for UK lenders, provided you can demonstrate consistency and stability. However, the exact amount of income a lender is willing to accept varies dramatically based on their underwriting criteria and whether you approach a standard high-street bank or a specialist finance provider.

Lenders need confidence that the income stream is sustainable and reliable. Since dividends are paid from company profits, they are inherently less guaranteed than a fixed employment salary.

The Lender’s Perspective on Contractor Income Verification

When assessing a contractor, lenders generally look at one of two primary methods for verifying income, depending on how the contractor operates and the lender’s specific policy:

1. Traditional Dividend Assessment (The Standard Approach)

Most mainstream lenders will assess your income based on what you have personally declared to HMRC. This includes your director’s salary plus the dividends you have drawn from the business.

• What they look at: They focus on the net amount of dividends paid out to you, as reflected in your personal tax returns.
• The requirement: Lenders typically require two to three years of evidence to ensure the income is stable and not a one-off performance spike.
• The drawback: If you intentionally draw low dividends to keep capital within the company, the lender will only assess you on the low figure, potentially reducing your maximum borrowing capacity significantly.

2. Specialist Assessment (Considering Retained Profits)

Specialist lenders understand the contractor model better. These providers may be willing to look beyond just the declared dividends and consider the company’s overall profitability, especially if you are the sole or majority shareholder.

• What they look at: The total pre-tax profit of the company (or sometimes the total turnover multiplied by a factor, known as the ‘day rate’ method, detailed below).
• The requirement: They need evidence that the company could sustain dividend payouts at a much higher level, requiring full company accounts, rather than just personal tax returns.
• The benefit: This approach often unlocks much higher borrowing amounts, as it reflects the contractor’s true earning capacity, not just their dividend withdrawal strategy.

Required Documentation for Dividend Income

Regardless of whether you are applying for a mortgage, a bridging loan, or another secured facility, gathering the correct financial documentation is crucial for proving dividend income.

The standard package of documents required generally includes:

• SA302 Tax Calculations and Tax Year Overviews: These documents, provided by HMRC (or generated by your accountant if they file digitally), are the most critical evidence. They verify the income declared from dividends and salary for the past two or three financial years. For information on how to obtain these documents, you can visit the official HMRC guidance on SA302s.
• Company Accounts: Lenders typically need two years of certified or audited company accounts. These show the company’s profit and loss, assets, and liabilities. They prove the funds were available to pay the dividends declared.
• Evidence of Shareholding: Documentation confirming your percentage ownership of the limited company.
• Contract History: Recent contracts (often showing a minimum of 6–12 months remaining) to prove current and future work stability.

It is helpful to present your application alongside a detailed letter from a qualified accountant explaining your business structure, dividend strategy, and the sustainability of the company’s earnings.

The Challenge of Retained Profits vs. Declared Dividends

The biggest hurdle contractors face when they ask, “can contractors use dividends as income proof?” lies in retained profits. It is common practice for profitable limited companies to retain a portion of their earnings within the business for future investment, stability, or tax planning.

If your company made £100,000 profit but you only withdrew £30,000 in dividends, a standard lender will only consider the £30,000. They cannot factor in the retained £70,000 because, legally, that money belongs to the company, not you personally, until it is formally distributed.

This is where considering a specialist lender becomes vital. If you need a borrowing amount based on the full £100,000, you will likely need a lender who is prepared to look beyond traditional affordability calculations and take a view on the overall financial health of your limited company.

Alternative Income Verification: The Day Rate Method

For highly skilled contractors, especially those working in IT, engineering, or consulting, some specialist lenders may use a ‘day rate’ calculation instead of scrutinising company accounts and dividends. This approach simplifies the process significantly.

The day rate method works by annualising your daily contract rate to calculate an assumed gross income.

For example, if you earn £500 per day, the lender might use a standard working week calculation (e.g., 46 weeks worked per year, assuming holidays and downtime).

• £500 (Day Rate) x 5 (Days) x 46 (Weeks) = £115,000 Assumed Gross Income.

This assumed figure is then used for affordability calculations. This method avoids the complexity of declared dividends versus retained profits entirely, but it typically requires:

• A history of contracting (often 12–24 months).
• A current contract with significant time remaining.
• Proof that your contracts have been consistent and there have not been long gaps between engagements.

Assessing Your Financial Health and Credit Profile

Even with excellent income proof via dividends and company accounts, lenders must assess your overall financial reliability. Your credit score and history play a significant role in determining the interest rates and terms you are offered.

Before applying for any significant secured finance, it is prudent to review your credit file to ensure accuracy and address any potential issues early. Lenders will perform credit checks to assess your repayment history, existing debt levels, and whether you have any defaults or County Court Judgments (CCJs).

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Important Considerations for Secured Lending

If you are using contractor income, including dividends, to secure a loan against property (such as a mortgage or a bridging loan), understanding the risks is paramount.

When obtaining secured finance, it is essential to have a robust repayment strategy that considers potential fluctuations in your contract income. Specialist loans, such as bridging loans, often have higher interest rates and shorter repayment periods than standard mortgages.

You must always be aware that your property may be at risk if repayments are not made. Consequences of default can include legal action, repossession of the secured asset, increased interest rates, and additional charges which significantly increase the total debt burden.

People also asked

How long do I need to be contracting to get a mortgage?

Generally, contractors need a minimum of 12 months’ history, but most traditional lenders prefer 24 or 36 months of continuous contracting income documented through SA302s and company accounts. Newer contractors may need to use specialist brokers who focus on the day rate method.

Do all lenders accept dividends for income proof?

Most lenders accept dividends, but they vary significantly in how much of the dividend income they will use in their affordability assessment. High street banks often take the declared dividend average over two years, whereas specialist lenders may consider a larger portion of the company’s retained profit or use the day rate calculation.

What if I haven’t taken a dividend for tax reasons?

If you haven’t formally drawn dividends, standard lenders will assess your income based solely on your salary, which may be very low. If you need higher affordability, you must either draw the dividends before applying, or you must seek out a specialist provider willing to assess the company’s retained profits instead.

Can I use my retained profits as a deposit?

Yes, company retained profits can be used for a deposit, but this money must first be formally extracted from the company (usually via a dividend payment) and into your personal bank account before it can be classed as personal deposit funds by the solicitor and lender.

Is it better to apply through a limited company or as a sole trader?

Lending criteria are generally simpler for sole traders, as the full profit of the business is assessed as personal income. However, contracting via a limited company (which pays dividends) is often more tax efficient. If using a limited company, seeking advice from a financial advisor or specialist broker familiar with contractor income is highly recommended to maximise your borrowing potential.

Seeking Professional Advice

Navigating the requirements for using dividends as income proof can be complicated, particularly if your financial structure is complex. Working with a financial broker or specialist lender who routinely deals with contractors can significantly improve your chances of securing the required finance and potentially increase the amount you are eligible to borrow. They can help package your application to clearly present your true earning capacity based on your company structure and contract history.

Ensure that any advice you receive is tailored to your specific financial situation and future contract projections.