If you are lucky, your limited company may find yourself in the position of having surplus cash left over at the end of the year. It is a great position to be in; however, handling extra funds in your business requires some planning to ensure that you manage this money in a tax-efficient way. Knowing your options is essential, as you can use the funds to support your growth and financial stability.
Whether your business has accumulated profits, received a sudden cash influx, or generated excess revenue, there are several ways to handle these funds, with a mind to minimising your tax liability. Our accounting team has outlined some strategies to manage any extra funds in your business, to give you some options to consider:
What is a cash surplus?
A cash surplus is the extra money your limited company holds beyond what’s needed for everyday operations.
There’s no straightforward formula to calculate how much surplus cash your business has. It comes down to careful forecasting and a clear understanding of whether the money in your business account is genuinely spare or required for working capital.
A cash surplus often refers to retained profits; some may already be set aside for upcoming liabilities like VAT, PAYE, or Corporation Tax. It’s also important to factor in any funds that you and other shareholders plan to withdraw from the company, such as dividend payments, to ensure there’s enough cash available when needed.
It’s worth considering the long-term impact of holding excess cash. If you have a significant ongoing cash surplus in your business account, you could be losing out as the money is likely much better employed elsewhere. Let’s look into what these options are.
Reinvesting in your business
If you’re looking to grow your business further, consider using your surplus cash to support future growth, whether by investing in new assets or maybe even by funding an acquisition. Certain investments may qualify for tax relief under the Annual Investment Allowance (AIA), reducing your taxable profits and overall corporation tax liability.
In a competitive and challenging job market, using excess cash to invest in recruitment or retain your existing team could also be a smart move. Putting money towards attracting and keeping the right people can help support long-term growth, ensuring your company is on a stable footing.
If you’re looking to expand through an acquisition, a cash surplus could give you the flexibility to fully or partially fund a purchase or to ensure that you’re ready to act if the right opportunity arises to acquire a competitor’s business and bring their operations into your company.
Investing in research and development
Investing in R&D has many advantages, helping you stay ahead of the competition while developing innovative products, processes, and services. Research and development may sound very technical, but really, this is all about improving your business and products, making them more efficient, or making your business better at serving your customers. This could involve implementing improved infrastructure or taking on new software or processes that will enhance the efficiency of your business.
Businesses with a solid R&D strategy are often better positioned for success in a fast-moving market. It keeps your company agile and competitive and supports long-term profitability while managing risks along the way. Additionally, businesses may be eligible for R&D Tax Credits, which can reduce tax liability and improve cash flow as the government aims to help businesses that seek to innovate.
Taking more dividends out of your business
For many business owners, having extra cash in the company presents an opportunity to withdraw money from their business. While most already use tax-efficient salary and dividend payments, you may be ready to consider drawing additional dividends.
Paying dividends can be a tax-efficient way to distribute extra funds to shareholders. Dividend tax rates are typically lower than income tax rates, making this an attractive option. However, it’s important to remember that once dividends exceed the personal allowance, the tax rate increases significantly.
Reducing your company’s debt
If your business has outstanding loans or financing agreements, using surplus funds to reduce debt can save on interest payments and improve your company’s financial health. While this may not always provide direct tax relief, lower debt expenses can boost your cash flow and long-term profitability.
Holding funds in a business savings account
Surplus funds in a business savings or investment account can generate some additional income. This can be an attractive option for directors to consider, as holding your excess funds in a business savings account will allow you to keep some money aside for emergencies if you ever need it for your business. The important part is that it will keep the money earning some interest. However, you should note that interest earned may still be subject to corporation tax.
Putting extra funds into pension contributions
Putting money into a pension scheme can be a wise way to make use of surplus funds. It’s one of the most tax-efficient methods for taking cash out of your business while securing your financial future. Plus, employee pension contributions allow for reduced National Insurance, making them an even more effective way to extract money from the company for your benefit. Employer contributions to a pension scheme are also deductible as a business expense, reducing your corporation tax bill.
What should I do with my excess business funds
Having surplus cash in the business might seem like a great position to be in, but how you manage it should align with your goals. Whether it’s reinvesting in growth, rewarding employees, or implementing structured financial planning, there are plenty of options to make the most of your extra cash while keeping tax liabilities to a minimum.
Seeking professional advice from an accountant can help you see the bigger picture with your company’s finances. Our team can help you gain clarity on the excess funds available in your business and the most efficient ways to use them to achieve your objectives.
If your business is holding excess cash that you are considering your options for, then get in touch with us; we have a range of accounting services that help you get the most out of your business.
Related Content
