Managing surplus cash in your company

Managing surplus cash in your company

Many limited companies find themselves in the position of having surplus cash left over at the end of the year. How you manage surplus cash in your company will depend on your company and personal situation. Before you decide how to use this excess cash, you need to work out how much surplus cash you have available to actually use.

 

What is a cash surplus?

A cash surplus is the additional cash that your limited company retains that exceeds the amount required for day-to-day operations.

There is no simple formula to work out the cash surplus in your business. It will be down to forecasting and truly understanding if the cash in your business bank account is excess or it’s needed for working capital.

 

How do I work out surplus cash in my business?

Firstly, you need to work out what cash you have over and above the day-to-day cash flow requirements of the business. 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.

A cash surplus is likely to be retained profits rather than actual money in the bank. It is likely that some of the money in the bank is already allocated or put on one side to meet liabilities such as VAT, PAYE or Corporation Tax bills.

You also need to consider and keep any funds that you and fellow shareholders will be drawing from the company for example dividend payments.

You shouldn't consider your cash surplus options until you know your various liabilities. Not leaving enough money in the business for liabilities could cause you issues later down the line paying your tax bills.

 

The problem of holding too much cash in the business

It's worth noting that accumulating excess capital in your company can cause problems at a later stage with succession planning or passing the company on, so working out how to manage excess cash now could be essential before you sell or pass on your company.

 

Ways to invest using the cash surplus

There are a variety of ways to invest and use surplus cash from your business and we cover a number of those options in this blog including:

• Reinvestment back into the business to fund growth
• Tax efficient restructuring
• Investment in research and development
• Director's loan
• Dividend payments
• Pension contributions
• Invest in stock market
• Gift to charity

 

Reinvestment back into the business

If you’re planning to continue growing your business then you could consider using the extra cash to fund future growth, either through investing in other assets such as property, plant, machinery, people or products or to fund a business acquisition.

Until March 2026, companies can claim 100% capital allowances on qualifying plant and machinery investments through full expensing. Full expensing allows companies to write off the cost of investment in one go. Under full expensing, for every pound a company invests, their taxes are cut by up to 25p.

With a buoyant and difficult recruitment market, investing in recruitment or your current people now to retain them, could be worthwhile to utilise excess cash. Utilising money to attract and retain the right people in the business to allow you to grow, could be a good long-term investment.

If you want to grow the business through acquisition, then your cash surplus could allow you to fully fund, or part fund a new acquisition or be prepared should the right acquisition opportunity come along.

 

Tax efficient business restructuring

Now may be the time to consider restructuring your company. You may want to consider setting up a holding company and create a group structure. This can create significant tax efficient benefits if set up correctly.

You could also look at de-merging. De-merging involves taking one company out of the group and into a new holding company. This means you’ll be running an investment business. By de-merging you create a trading group for your operational activity to take place and an investment group to hold excess cash, enabling that cash to work better for you and your business.

It's advisable to speak to a qualified tax advisor before considering these options.

 

Research and development

The benefits of investing in R&D are numerous and it can be a great way to stay ahead of your competition and to bring new innovative products, processes and services into the market.

In today's competitive world, businesses with an effective R&D strategy are more likely to succeed than those without it. The strategy will also help a business remain agile, competitive, adaptable, and profitable, whilst also balancing the risks.

Director's loan

This option is not normally advisable due to the potential tax liabilities involved, but in certain circumstances, it can be used. A director's loan is an amount of money that a director borrows from the company. Although this could be useful in the short term, there are tax implications to consider. Seek advice before using your surplus cash in this way.

Dividend payments

For many owners, having excess cash in the business is an opportunity to withdraw money from the business. Most business owners will already be taking advantage of tax efficient salary and dividend payments but may be considering taking further dividends.

It is worth considering that if you pay dividends over the personal allowance, the tax rate on those dividends will significantly rise and you'll be subject to additional tax.

The dividend tax rates are currently:

8.75% basic rate threshold on taxable income  up to £37,700

33.75% higher rate on taxable income between £37,701 and £ £125,140

39.35% additional rate, from 2023/24 onwards, on taxable income over £ £125,140

 

Additional pension contributions

It may be a good idea to invest money into a pension scheme. Paying into a pension is one of the most tax efficient ways to extract cash from the business.

Your company can make pension contributions directly into your pension fund whether it be a stakeholder scheme or a SIPP and these should receive full Corporation Tax relief in the year that they are paid (subject to certain restrictions).

They are also National Insurance free which can make them a very tax efficient way to utilise surplus cash and extract it from the company for personal benefits.

If you haven’t utilised your  £60k per annum allowance, then now may be the time to pay into shareholders pensions. If you haven’t utilised the full allowance in the past three years, you can increase your allowance this year. The previous maximum annual pension contributions were £40k up until the tax year 2022/23.

 

Invest in stocks and shares

If your limited company is looking for additional income, investing in stocks and shares could be a route to take. However, you must be mindful that investing in the stock market does come with some risk, dependent on investment performance of your portfolio.

It is generally more tax efficient to make investments personally because you will receive an annual exemption of £ £3,000 where your capital gains would be tax-free; companies do not receive capital gains annual exemption.

Speak to a financial advisor or financial planner before you proceed with this option.

 

Gift to charity

Some owners opt to gift their annual cash surplus to charity. Many companies today gift to charity as part of their Corporate Social Responsibility (CSR) policy.

If you donate to charity through your limited company, you’ll need to keep the documentation supporting the donation. Donations can then be included in your accounts as a business expense. Donating through your limited company lowers your profits and, therefore, your Corporation Tax.

 

Conclusion

Having excess cash in the business may seem like a good problem to have but how you manage this cash will depend on your objectives for both the business and you and your fellow shareholders.

It's worth seeking professional advice from an accountant and tax advisor such as Haines Watts to fully understand what excess funds you have in the business and the best way to utilise them efficiently and to meet your objectives.

 Contact us at our offices in Wirral, Chester and Liverpool to advise you today.