Managing of cash surplus looks like to be a more difficult task than just earning it. There are many options available with the limited companies to invest cash surplus or retained earnings. Firstly, you must work out how much amount of cash surplus is available with your company for investment so that you are able to make proper estimate of the earnings that you must retain in order to pay your liabilities, whenever they become due. It will be considered a good step, if you will go forward only with the retained profits for investment purpose rather than using your bank cash which is needed at times to pay corporation tax on annual basis & VAT and PAYE on quarterly basis.
If you are planning to invest your company profit, you may have the following options available with you –
- Do nothing–The first option for you is self-explanatory - Don’t do any investment and retain your cash in your company’s account to earn interest.
- Investment in high interest accounts/bonds - Investment in high interest accounts/bonds is also considered as one of the best ways of investment, if you are having no immediate plans of using your company cash. You can earn higher rate of interest by depositing company’s cash into high interest account or company bonds for a specific period of time (30days, 60 days, 90 days, 6 months, 1 year etc.). However, you should also take care that once you have deposited the money into high interest accounts/bonds for a specific period, you will not be able to withdraw that amount before the settlement date and if you will withdraw, you need to face penalties in such cases.
Doing investment in high interest account/bonds can also be availed as one of the exit strategies for the future, when you end contracting or take retirement. Many people after closing the company distribute the accumulated retained profits as capital to get benefits in the form of lower tax rate in comparison to dividends.
- Avail the loan facility from the company - Director’s loan is the loan amount borrowed by the director from the company which may proves to be an effective short-term solution to loaning money. This option is used in certain circumstances but not generally advisable due to involvement of potential tax liabilities on directors P11 benefits.
In addition to it, there are more tax implications when director is also a shareholder in a limited company. Hence, you must take care of these points carefully before using this approach in future. It’s better to seek an expert advice on this matter rather than going forward all alone.
- Make company pension contributions - The other way of using your cash surplus or retained earnings is that company can make contributions directly into the pension scheme – Whether shareholder or to stock invested personal pension scheme (SIPP). The greatest benefits that a company receive after making contributions to pension fund scheme are –
- Receiving full corporation tax relief in a tax year
- Free from National insurance contributions
It is important that before making any investment decision related to pension contribution, you must take an advice from a professional expert.
- Distribution of funds or dividends - You may also consider the option of distributing your cash surplus as dividends instead of retaining and investing them within the limited company. It is generally suggested that dividends should be declared every year as they are taxed at lower rate in comparison to salary of 7.5%. It is basically done to take gross total income of a company annually at least up to the basic threshold of £37500 after making the use of personal allowance. The amount of tax you pay on a dividend over & above the dividend allowance depends upon your income tax band. The tax free dividend allowance is £2000. In case, your total income exceeds the basic rate threshold, you will fall into the category of higher rate taxpayer;then you need to pay additional tax rate of 32.5% on dividends. Paying additional tax may still be considered advantageous as you will be able to get the benefits of dividends received and know the tax level on which they will be paid.
Note – Dividends can only be paid through profits and it is advisable that before investing the cash surplus into dividend, you must take an advice of a professional expert to understand pros and cons of it.
- Investment in stocks, shares & property - Want to earn an additional income for your company by doing investment in stocks, shares and property? Many companies now days taking this route in order to get higher return. Before making investment into such type of assets, you should be aware that it might be possible that you lose all your money in case the value of assets falls down or the company in which you have invested goes into liquidation. Prices of stock and shares fluctuate quite frequently and therefore you need to be very careful while investing for stocks & shares. Normally, you receive £12000 as an annual exemption, when you make your investments personally which leads to tax free capital gains and makes company free from the exemption limit - It is considered as more tax efficient way of making investment. However, companies do receive an indexation allowance that makes increase in the base cost of the investment.
Property is basically a long term investment that can be used for future rent cash flows. When you invest in a property, it is for longer period as it is not a liquid asset (which can be quickly converted into cash). However, instead of renting, you can do investment in a property for the company premises alternatively.
Hence, it is advised that you must use only your spare cash for investment in stock, shares & property.
- Gift it as charity - If you don’t want to invest your cash surplus anywhere, you can also give that amount as charity which may give you some tax relief.
In case you are having any questions regarding managing of cash surplus in a limited company, Kindly call us on 03330886686 or you can also e-mail us at email@example.com
Also See: Limited company tax basics for professional contractors