If your business is going from strength to strength you may find yourself with surplus cash in your limited company at the end of your financial year. A cash surplus is simply extra money over and above what you need to run your business (working capital).
It’s often a good idea to have around three months of working capital set aside for contingencies, but anything beyond this can present opportunities for you and your business.
So, what can be done with surplus cash in a limited company? Ultimately, it’s up to you as company director. In this article, we share eight possible options for excess capital.
Disclaimer: While we’re here to help, the contents of this article are for informational purposes only. They do not constitute financial advice. For that, you should consult your accountant or a qualified independent financial adviser.
If you find yourself with some extra cash in your limited company, you might want to consider one of the following options:
Let’s take a look at each of these in a little more detail.
The first and easiest option when faced with a cash surplus is to simply do nothing. Leave the extra money in your business bank account, where it can earn some interest and be easily accessible in an emergency.
However, while it might be easy, it’s not always wise.
Keeping surplus cash in your business bank account can be risky and inefficient. Here’s why:
Instead of leaving your extra cash in your business current account, you might want to consider transferring some of it into an Easy Access Business Savings Account. That way, you can enjoy the best of both worlds — complete flexibility while generating higher returns on your cash reserves.
However, as with personal savings, you’ll probably earn even higher interest rates by locking your money away for the long term.
If you don’t need instant access to your cash, you may want to opt for a Business Notice Savings Account (which requires you to give a set number of days notice to withdraw your funds, e.g. 90 days) or a Fixed-Term Business Savings Account (where you leave your money untouched for 1-5 years in exchange for a fixed, higher interest rate).
This presents unique opportunities that you can access with Insignis. By adding your money to our platform, you can access exclusive rates and hundreds of business deposit accounts from over 45+ banks and building societies to increase your cash reserves.
With Easy Access, Short-Term Notice and Fixed-Term accounts, you can capitalise on liquidity events and withdraw funds when your business needs them. What’s more, if your limited company is eligible, you can optimise the FSCS protection of your cash by spreading it across multiple financial institutions with the click of a button.
If you’re currently repaying a business loan, a cash surplus could allow you to make some early repayments (or clear the loan altogether).
This might be the option for you if the interest rate on the loan is higher than the interest you’d earn by putting the money into savings. You could save a lot of money in the long run by making early repayments or paying off the loan entirely.
Just remember to check whether your lender charges an early repayment fee.
Many business owners use a cash surplus to fund growth. By reinvesting it back into the company, you can explore new markets (at home or abroad), pioneer new products, or hire more staff. And that’s just the tip of the iceberg.
Depending on the level of surplus available, there are several other ways to spend it to scale your business, such as:
Note: You’ll be able to claim capital allowances on many of the activities listed above, which allows you to deduct some or all of the value of an item from your profits before you pay tax.
Another way to generate additional income for your business could be to invest some of your cash surplus in stocks and shares. As a long-term strategy, investing has the potential to outperform savings. However, it’s worth remembering that there’s risk involved, and investments can go down as well as up.
It’s recommended that you speak with a qualified financial adviser before investing.
Another popular way to extract excess cash from a limited company is to top up directors’ salaries or reward shareholders by issuing dividends.
However, if you’d like to do this, it’s worth discussing the tax implications with your accountant first.
Remember, you don’t pay any tax on dividend income that falls within your Personal Allowance (the amount of income you can earn each year without paying tax). You also get a dividend allowance each year, meaning you’ll only pay tax on dividend income above that threshold (£500 for the 24/25 tax year).
Dividends earned above the dividend allowance will be taxed depending on your Income Tax band:
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Saving for retirement? Paying into a pension via your limited company can be a tax-efficient way of extracting surplus cash and setting it aside for the future.
There are several clear benefits to this approach:
Again, before you take this route, speak with your accountant or a financial adviser specialising in pensions to ensure you comply with HMRC's requirements.
Finally, you may want to gift some or all of your cash surplus to charity. Many companies do this as part of their Corporate Social Responsibility (CSR) initiatives. It can also help strengthen ties within your local community and attract positive PR.
If you choose to donate via your limited company, you must keep proof (e.g., documents, receipts, or bank statements) as you can include the donation as a business expense in your accounts. Donating through your company can lower your profits, which in turn can reduce your Corporation Tax bill.
To recap, there are several ways to maximise your limited company’s cash surplus. Whether you want to save, spend, invest, gift it to charity, or top up your pension, make sure you speak with a qualified financial adviser or your accountant first.
Want to save your business surplus? Optimise returns, protect your company’s savings (subject to eligibility) and enjoy hassle-free cash management with Insignis.
Ask your accountant or financial adviser about how you can get started today.
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