If you’re the owner of a creative business and you find you have an excess of cash in the business bank account, there are things you can do with the money that may be advantageous over just letting it sit in the business bank account.
To work out if you have surplus cash in your business, (and to ensure you are clear on the reasons why cash in the bank does not always equal profit), you need to calculate the surplus amount of cash you have over and above the amount required for the day-to-day operations of your business.
Don’t forget to factor in future invoices, tax bills and salary costs, and look at your cash flow forecast before you arrive at your surplus cash figure.
So, what are the options?
Distribute as dividends
It may be possible to pay the shareholders an increased dividend payment, but should be considered carefully before doing so. In 2016 the government reduced the dividend allowance from £5,000 to £2,000 and have increased tax rates on dividends to stop company directors from taking excessive amounts of surplus cash out of the business.
This means that should you find you have excess cash in your business account you should think carefully about what to do with it so you avoid paying a large amount of it towards your corporation tax bill or run the risk of paying a large amount of tax on dividend payments (depending on your current tax bracket).
Invest in your business growth
You can use excess cash to invest in new equipment, property, marketing or new staff in order to grow your business. This may be a good time to invest in new hardware or software, or into further training of your existing staff.
Pay more into your pension.
You may be able to pay an additional amount into your pension, depending on your scheme, of up to £40,000 per year, and more if you have not been utilising the full amount in previous years. Investing in a pension scheme is a tax-efficient way of using excess cash in your business account to improve your personal wealth.
Invest in a qualifying Research and Development project.
Although not open to all kinds of creative businesses, software developers and digital firms may find themselves eligible to invest in R&D projects which can have rewarding tax credit incentives. If your firm is investing in new SaaS products (software as a service) or developing new code or algorithms you may find yourself eligible.
Consider p2p lending.
Peer to Peer lending (known as p2p lending) allows you to lend money to other people without the need to go through a bank. Returns on your money can be much higher than traditional bank interest rates, but be warned, the rate of defaults with people borrowing through p2p platforms is also higher.
Place the money in a higher-interest bank account
Placing money in a higher-interest bank account will reward you with higher interest than your current business bank account. However, be aware that you may have to lock the funds in the account for a certain amount of time, meaning you may not be able to withdraw in an emergency.
Invest in bonds, stock or shares
You should consult with investment experts before investing any company cash in stocks and shares, and be mindful that your initial investment amount can fall as well as grow.
Seek professional advice as you may find it is more tax efficient to make investments with your own personal money because you will receive an annual exemption (£12,300) in which your capital gains would be tax-free, which is not the case for companies which do not receive an exempt limit.
Always seek expert advice…
If you do find you have surplus cash in your business, it’s vital to understand the amount of money you have at your disposal and be sure to seek professional advice from your accountant before you do anything with it.
Speak to AO Accountants who can advise on this, helping to make sure you’re making the right decisions which align with your business and growth plans.