Lots of businesses accumulate cash.
As a business owner, you too may have accumulated some in your business account over time. You might be saving for a rainy day, planning for a future investment or business acquisition, or simply you’re having a profitable year. But too often we speak with business owners with close to 6 figures or more sitting in their business current account earning absolutely nothing!
We have clients, and we speak with accountants who have clients, who accumulate cash in their business, who don’t know what to do with it and don’t want to take it out to pay the tax.
Whatever the reason, you may be wondering what to do with it and how to make the most of it?
Here are some considerations to think about. Before rushing ahead with any of them, please speak to both ourselves and your accountant first!
Can you take the cash out?
The first question to ask yourself is whether you need or want to take the cash out of your business?
This will depend on your personal and business circumstances, such as your income, tax situation, and future plans. You might want to squirrel away some cash so that you can move quickly if a property or a new business venture was on the horizon. But if the business doesn’t need the cash, what then?
There are several different ways to move the cash out of the business and into your own name, each with its own advantages and disadvantages. The two main ways are pension contributions or dividends.
Pension
You can make employer contributions to your personal pension from your business account. This can be a tax-efficient way to save for your retirement. It should qualify for corporation tax relief on the contributions so it will save the business money and you won’t have any income tax and national insurance to pay.
However, you will not be able to access the money until you reach the minimum pension age, which is currently 55 but will increase in the future.
So while it helps you from a tax point of view now, it doesn’t necessarily help your lifestyle now.
Dividends
You may be able to pay yourself dividends from your business profits. This can be a flexible way to take the cash out, as you can decide how much if you are the Director and Shareholder.
However, you will have to pay income tax on the dividends you receive (and Student Loan Repayments if you still have one). The company will also have to pay Corporation Tax on the profits before you can declare the dividend as well.
You will have to pay dividend tax, which is currently 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers. The paltry £500 dividend allowance isn’t going to soften the tax blow for you.
The advantage of this, however, is that you have the remaining cash after tax in your hand today to put food on the table, fuel in the car or go on that holiday.
There are things we can do to minimise the tax impact, but it would mean tying the money up for at least 5 years – if you’re interested in this, give us a shout!
But what if the cash needs to stay in the business?
If you decide to keep the cash in the business, you may want to look for ways to make it work harder for you.
This will depend on your risk appetite, time frame and liquidity needs.
Business bank account(s)
You can keep the cash in a business bank account that pays interest. This can be a safe and easy way to earn some income on your cash without taking any risk.
However, the interest rates are less than 5% and linked to Bank of England Base Rate, so if interest rates fall, your savings account rate will likely reduce too. Long term, you are unlikely to beat inflation.
You will also have to pay corporation tax on the interest income.
We can help you to try to maximise your return while keeping the full FSCS protections available to you.
Two accounts are easy to track and manage, but more than two can become a headache, especially when you have to individually apply to each one and jump through each of the banks’ compliance and anti money laundering requirements.
Please ask us about this if we can help.
Corporate General Investment Account (GIA)
You can invest the cash in a corporate GIA, which is a type of investment account that allows corporates to invest in share portfolios. This can be a way to potentially achieve higher returns on your cash depending on the performance of the assets. However, it comes with the usual investment risks as the value of the assets can go up and down, and you may not get back the full amount you originally invested.
You will also have to pay Corporation Tax on any capital gains or income from the investments. As with any investment, this needs to be cash you don’t think you will need for at least 5 years.
The answer is probably not “All or Nothing”
As you can see, there is no one-size-fits-all answer to what to do with cash in your business.
You will have to weigh up the pros and cons of each option and decide what suits your needs and goals best. Likely, the correct answer will be a mix of the different options.
As always, you should definitely speak with your accountant and your financial planner before proceeding with any of this!