If you believe you’ve built up a cash surplus within your company, the very first thing you need to do is uncover how much of your surplus is true free cash (also known as retained profit), and how much of your surplus you’re going to have to leave within your company in order to pay for any upcoming liabilities, such as certain taxes that won’t be due for several months.
Though there are a variety of options available to you in dealing with your surplus, below we’ve detailed five of the most common ways contractors and small companies entertain a surplus in their business; not a bad problem to have, by all accounts!
1) Do Nothing
It should be immediately noted that any retained profit within your company will only be taxed once, during the year in which said profit is made. For this reason, leaving your surplus within your company account won’t do you any harm, and it will certainly earn interest, but this will likely be at a low level under current market rates.
2) Create an Investment Portfolio
As a contractor or small business owner there’s no reason why you cannot create an investment portfolio with your cash surplus, investing in everything from residential and commercial properties (for rental purposes), stocks and shares, bonds, loans, and deposits, and even trading in foreign currencies.
When entering into any of these investment options you’re advised to do your due diligence and not, as they say, put all your eggs in one basket. Better still, only invest ‘spare’ cash from your surplus, monies you’re willing to lose should your investments not pay off.
3) Place it Into High Interest Accounts and Bonds
This is only an option if you have no immediate plans in which to use your retained profits, as once placed into a high interest account or bond(s) you will be unable to touch it for a defined period of time without paying a steep withdrawal penalty.
This is simply a ‘higher risk, higher reward’ version of doing nothing, as your interest payments will be higher but your funds will be unavailable (without penalty) in an emergency.
4) Distribute as Dividends
Declaring all, or part, of your surplus as cash dividends is an easy way to remove said profits from your company, with you being advised, in most cases, to declare your dividends once every tax year so you’re able to add it to your total take-home income, incorporating it into your current high rate tax threshold, as dividends can be taken tax-free up to this level.
If your total income (including your salary, any interest payments, and your dividends) exceeds the high rate threshold you’ll have to pay additional tax on your dividends.
5) Fund a Pension Pot
If you’re planning for your retirement, funding a pension pot with your cash surplus is a great way of efficiently moving cash away from your company, as contributions made during an accounting year will receive full corporation tax relief (certain restrictions will apply), and you won’t be liable to pay National Insurance Contributions (NICs) on them.
The downside, of course, is you won’t be able to access these funds until you retire.
Handling Your Cash Surplus
To speak with a professional to receive personalised advice on how you can best handle your cash surplus, contact us here at Tax Agility today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.
This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.