It’s not uncommon for a private limited company to have surplus cash left over at the end of a year. If you are the owner or major shareholder of a company with an excess of cash, you might not be sure what to do with it. There are some useful options that you could examine. Let’s take a look at what some of these are and how they may fit to your situation.
WHAT IS SURPLUS CASH?
First off, you need to work out how much of that cash surplus you can actually use to invest in some way. That is, any cash over and above cash flow requirements to meet all the company’s operating expenses and liabilities.
For example, some cash may very well be earmarked for being paid out as dividends. Some might also need to be kept aside to pay off liabilities due after a year end, such as corporation tax and other taxes.
Therefore, consider a cash surplus as any retained profits rather than actual money in the bank. Much of the time, money in the bank is already allocated to cover things like PAYE and VAT. Since VAT is paid on a quarterly basis, and corporation tax 9 months after a year end, it’s easy to accumulate a fair sum of money without actually being able to invest it elsewhere.
Don’t forget to include any funds you would need to draw from the company to cover your personal living costs before calculating what is spare.
DEALING WITH SURPLUS CASH APPROPRIATELY
There are numerous ways that you could use that cash surplus to your advantage, and we’ll look at some of them for you. These are the most common and recommended courses of action for those with a cash surplus, which include, but won’t be limited to, the following ideas. However, every business is different, so these ideas may or may not apply to you specifically.
The first thing that you could do with it, of course, is nothing. The money will simply sit in the company bank account and won’t be used for any particular purpose. It would gain minor, meagre amounts of interest over time. That cash surplus, though, could be put to better use.
INVESTING YOUR SURPLUS CASH IN BONDS
Instead of sitting in a bank account earning low levels of interest, you could invest that money into a high interest bond programme. This is a common choice for many businesses and can result in it gaining more interest. You can secure higher interest rates from a bond, but the cash must stay locked in for the bond’s set time period. If you take your money out of a bond early, you will pay for this in penalties. Therefore, make sure that you are happy with the decision before continuing any further.
Please note though, that any investments made in bonds or shares etc as per the following paragraph, will need to be made in your limited company’s name rather than your own. If you transfer surplus cash to your personal account to invest, HMRC could deem this withdrawal to be a dividend.
UTILISE THE CASH SURPLUS TO INVEST IN STOCKS AND SHARES
One other way that you could use the money, of course, is to invest in stocks and shares. This is useful for boosting the income of your business but requires you to have some knowledge of the stock market. However, only invest spare cash: if you make a mistake, it could see that cash surplus go towards nothing but poor decisions.
If you ever intend on claiming Entrepreneur’s Relief in the future, though, you need to consider what assets would qualify under this.
RENTING PROPERTIES WITH SURPLUS CASH
While not for everyone, as it requires a good knowledge of the housing market, you could earn your business additional income by renting properties out. The cash surplus might be enough to put towards buying or taking on a mortgage for a property. This could then be improved and rented out, bringing in another source of income. Again, it needs you to understand the housing market – and be prepared to take a risk.
It’s a calculated gamble, but it is also a good way to use your excess funds in a more interesting manner.
PENSION FUNDS BUILT WITH A CASH SURPLUS
You could also put that cash surplus to good use in the form of a company pension fund. If you are looking to better plan for retirement, then you could set up regular pension contributions that go directly into this pension fund. Keep in mind that these contributions are an allowable expense for corporation tax purposes, if you choose to do this. As ever, you should seek out independent, trusted financial advice on what you need to know about setting up a pension fund and making contributions.
ESTABLISHING A RETIREMENT COMPANY
By the same token, you could be using some of this surplus cash to work on building a healthy retirement company fund for yourself. It won’t be the right choice for everyone, but it can be one way of securing your future. Retirement companies set up from a cash surplus are common, but just remember that it means this money will very likely be tied up until you do actually retire. If you have any inkling that it might be needed before then, this may not be the best option available to you.
DISTRIBUTING IT TO SHAREHOLDERS AS DIVIDENDS
One option that many companies will choose, is to redistribute this money across the shareholders as dividends. You could do this so that you take your drawings for a year up to the basic rate threshold. Dividends are usually taxed at a lower rate than salary, and the first £2,000 of your dividend income will be tax-free in this and the next tax year.
MAKING THE RIGHT CHOICE
Every business owner will have their own decisions to make with regards to engaging with a cash surplus. With that in mind, we recommend that you spend a bit of time looking over the options available to you. If you are still unsure of what option(s) may be best for your surplus, contact our team today.
We can guide you to put in place a clear plan of action. At Devonshire Green, we can help you to make more informed decisions about how that cash surplus could be handled to suit your circumstances. For more information and advice, contact us to discuss it.
