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Business Investment Accounts UK: Investing Surplus Business Cash UK

If you’re a business owner, you’ll naturally want to make the most of any surplus business cash you have in your company, and sometimes business savings accounts just don’t make the best returns.

In this guide, I’ll show you some of the best business investment account options to help you make the most of your surplus business cash.

Also consider: Best online business banks

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1. Invest in stocks and shares

The first and most common option for investing surplus cash is to invest directly in stocks and shares of companies listed on the stock market.

You can invest in companies across various industries, sectors, and geographical regions, creating a diversified portfolio with the right balance of risk and reward for you.

You can then generate a return by selling stocks and shares for more than you paid for them. Or if a company pays dividends to its shareholders, you can simply sit tight and take these over time.

However, there’s still risk involved with stocks and shares. Your investments may fall instead of rising in value and you might get back less than you invested.

Additionally, unlike cash which you may be able to access immediately, you may have to sell stocks and shares to access the value, meaning they could be an inappropriate option if you’ll need access to your money in a pinch.

At this stage, you may then have to pay Capital Gains Tax (CGT), depending on whether you have any of your CGT exempt amount (£12,300 in 2022/23) left in the tax year you sell your investments.

It may be more tax-efficient to invest money through your company rather than managing your investments personally.

Typically, any profits your business investments generate will be subject to Corporation Tax, currently charged at 19% in 2022/23. This can make it more tax-efficient to invest through the business, rather than withdrawing the cash and paying your personal rate of Income Tax of 20%, 40%, or even 45% on it.

Bear in mind that Corporation Tax is set to rise to 25% on 1 April 2023, unless your business benefits from the Small Profits Rate which will remain at 19%.

In general, stocks and shares are best held over the medium to long term, with a time frame of at least five years. Be sure that you won’t need your money in this period so that you give your investments adequate time to rise in value.

Pros and cons of investing in stocks and shares

Pros

  • Can be a useful way to generate returns on your money.
  • Tax rates of investing company money can be favourable.
  • Choosing dividend-paying stocks and shares can make this an income-generating option.

Cons

  • Interest rates are currently fairly low, meaning you may not see much growth. This means the true value of your money may be Risk involved, so you’ll need to carefully select your investment choices.
  • Illiquid – you’ll need to sell your investments to access the cash.
  • Often requires a long time frame to see gains in value of companies you invest in.

2. Invest in funds

Rather than buying individual stocks and shares, you could consider investing in funds instead.

Funds are packages of investments that you can buy units in. The value of your units will then rise and fall depending on the performance of the assets within it.

Some funds are handled by a fund manager, an investment expert who actively selects which investments are included. Meanwhile, others are “passive”, with the assets determined by an index or sector.

For example, you might buy units in a FTSE 100 index tracker fund, which simply tracks and invests in all of the companies listed on the FTSE 100 at any given time.

This means you can buy a single, diversified selection of investments which could rise in value. You’ll also receive any dividends directly, offering regular income if there are dividend-paying companies contained within it.

Also consider: Funds vs Shares: Which is Better?

Naturally, as with any investment, funds are not perfect. There is of course a risk that you’ll get back less than you invested if the assets within the fund do not perform well.

There is also the same issue of liquidity as shares, meaning you won’t be able to access your money instantly if you need to.

One other downside is that there are typically management fees involved when investing in funds. These tend to be higher for funds with a manager, as the fees will be used to compensate them for their work.

Pros and cons of investing in funds

Pros

  • Instant diversification in a range of companies from a single investment.
  • Dividends are paid out to investors, offering income on your investment.
  • An expert has a handle on your money if the fund you invest in has a fund manager.

Cons

  • Some funds may come with high management costs.
  • No particular tax advantages for your surplus cash.
  • Similar risk and liquidity issues as other stocks and shares.

3. Invest in bonds

Bonds are another useful way to invest a cash surplus nest egg from your business.

Bonds are like small loans that you can make to either companies through “corporate bonds” or even governments through “treasury bonds” or “gilts”.

The company or government you have loaned money to must then pay you interest over a fixed period until the maturity date of the bond. This makes them a useful vehicle for generating an income.

Alternatively, you can seek to sell your bond on a secondary market, ideally for more than you paid for it. While you won’t receive the interest payments anymore by doing this, you can generate a quicker return than waiting for these payments.

However, bear in mind that rates on bonds can vary massively depending on the market, and you may become stuck with a bond paying little interest if you’re unable to sell it.

There’s also the risk with corporate bonds that the company will fail and be unable to meet its obligations to you. This possibility does exist with gilts, although the likelihood of a government failing entirely is obviously far less likely.

Pros and cons of investing in bonds

Pros

  • Invest in an income-generating asset that regularly provides a return.
  • Range of options across corporate and government bonds.
  • Can be sold on a secondary market for an instant return if preferable.

Cons

  • Rates can be unfavourable depending on market conditions.
  • Your money is tied up unless you’re able to sell the bond before the maturity date.
  • You may not get back what you invested if a company fails and is unable to pay you.

4. Make pension contributions

Another option is to make contributions to your pension fund.

Money in your pension will be invested depending on the type of pension you have. For example, if you contribute to a private or “stakeholder” pension fund, this will usually be handled by other experts.

Meanwhile, if you have a self-invested personal pension (SIPP) or a small self-administered scheme (SSAS), then you’ll be able to select the investments held within the pension yourself.

Making pension contributions with surplus company cash can come with two significant, tax-efficient benefits:

  1. You’ll receive tax relief at your marginal rate of Income Tax on contributions up to the pension Annual Allowance (£40,000 in 2022/23).
  2. You’ll receive Corporation Tax relief on your contributions as employer contributions to a pension from pre-taxed company income are typically considered to be business expenses.

Bear in mind that you typically won’t be able to access your money until you turn age 55 (rising to 57 in 2028).

You could also make pension contributions directly to your employees’ funds.

These contributions receive full Corporation Tax relief and are National Insurance-free, making them a great way to reduce your tax obligations.

Obviously, while this is a useful perk for your employees, you personally won’t benefit from making employee contributions in any way other than reducing your tax bill.

Pension tax rules are known for being complex, so it’s often sensible to speak to a professional advisor if you’re unsure whether this is the right option for you and your business.

Pros and cons of making pension contributions

Pros

  • Tax-efficient option, offering tax relief and reducing a Corporation Tax bill.
  • Can invest your money for your future in a range of assets.
  • Can also contribute to employee pensions for similar tax and National Insurance benefits.

Cons

  • Won’t be able to access these funds until at least age 55 (rising to 57 in 2028).
  • Limits such as the Annual Allowance may reduce how much you can tax-efficiently invest.
  • You will likely need to seek financial advice to assist with complex pension tax rules.

5. Invest in property

Another option you have for surplus cash is to invest it in property in some way. You could either use your money to buy property outright if you have enough, or use it as a deposit and make a purchase with a mortgage.

You can typically generate value from property in two ways:

  1. Growth in value. This involves waiting for the property’s value to rise, and then selling it for a profit.
  2. Collecting rent payments. By renting out the property, you can generate a regular income from the payments you receive from your tenants.

You can capitalise on both these possibilities, renting out the property over a period of years and then perhaps cashing in on any gains in value by selling when you come to retire.

However, there are some key drawbacks to note with property investment.

Firstly, it can be expensive to buy outright. According to the UK House Price Index, the average UK house price was £283,000 in May 2022 when data was last available.

While houses aren’t your only option for buying property, this goes to show the high costs of buying bricks and mortar.

As a result, it’s unlikely your cash surplus will be big enough to afford property outright, meaning you’ll likely need to take out a mortgage to buy. So, you’ll need to be confident that your business can afford to take on this debt.

There are also additional tax concerns that you may be subject to when buying and selling property, including:

  • Stamp Duty Land Tax (SDLT) on your purchase
  • Income or Corporation Tax on rent payments, depending on how you structure the purchase
  • Potential Capital Gains Tax (CGT) on gains when you come to sell.

There will be time and costs involved with renting a property and collecting payments, and there’s also no guarantee you’ll be able to find a buyer when you decide you want to realise any gains in value – which are not guaranteed, either.

This makes property quite an illiquid investment – it’s hard to access your money quickly if you need it.

All in all, while property can provide growth on investment and income in the form of rent, you’ll need to balance these advantages with some rather significant drawbacks.

Pros and cons of investing in property

Pros

  • A physical, tangible asset for storing your surplus cash.
  • Property market has steadily increased in value historically.
  • Potential for rent payments can make this an income-generating asset.

Cons

  • Expensive upfront costs of property may make it inaccessible.
  • Taking out mortgage debt through your business may not be appropriate for you.
  • Collecting rent payments can be costly and time-consuming.

6. Make a company-to-company loan

A less common and likely riskier option, making a company-to-company loan involves you lending your surplus cash to another business to use. In return, you can earn interest from the business you’re lending to.

This allows you to generate an income on your cash, all while supporting another business that you believe can grow into something even greater.

Meanwhile, that business may prefer to borrow from you as you’re able to offer better rates and more favourable terms than a bank might be able to.

It’s important to be aware that there are a couple of notable drawbacks to this method.

Firstly, you won’t reduce a Corporation Tax bill as the loans will not be considered a business expense. In fact, you may have to pay Income Tax on any interest you do receive. As a result, this isn’t a particularly tax-efficient method.

Additionally, you’ll need to create a loan agreement that details all the important terms and conditions of the loan so that your money is protected.

You should also bear in mind that you may lose your money entirely if the business fails and is unable to pay you back.

Pros and cons of a company-to-company loan

Pros

  • Support a fellow business owner and invest in a company you see potential in.
  • Generate income from the interest you receive on the loan.
  • Invest in a company that’s potentially not available on normal markets.

Cons

  • Not particularly tax-efficient, and may be subject to Income Tax.
  • Potentially high risk as your loanee may become unable to pay you back.
  • Can require a great deal of paperwork and underwriting to protect you and your money.

Why should I invest my surplus business cash?

Having surplus cash is generally a good thing: it is often a sign of a profitable company that has been well-managed, is able to meet all its financial obligations, and has a healthy cash flow.

However, now that you’ve created this surplus in your budget, you need to manage it carefully and consider all your investment options.

This is particularly relevant in the inflationary environment currently affecting the UK.

Imagine that you have a cash surplus of £20,000 sitting in your company bank account. According to Moneyfacts as of 20 July 2022, the highest available interest rate on an easy-access business savings account is 1.25%.

Assuming interest was paid annually, that means you’d have £20,250 in a year’s time.

But, according to the Office for National Statistics (ONS), the rate of inflation reached 9.4% in the 12 months to June 2022, the highest rate in 40 years.

That means £20,000 of goods and services would cost £21,880 after a year of inflation at 9.4%.

So, while your surplus cash may have increased in value, it has lost spending power compared to the wider economy.

As a result, it’s important to consider investing your money so that it retains its spending power over time.

Should I invest through a separate investment company?

One other thing to think about when investing surplus cash as a business owner is whether or not to do so through a separate investment company, rather than through your trading company.

There are various liabilities to bear in mind that may make this a consideration you need to take into account.

For example, if your investment activities account for more than 20% of your total company income, you may become ineligible for Business Asset Disposal Relief (BADR) when you come to sell all or part of your business.

Additionally, it can also be useful to keep these activities separate so that if one company were to find itself in financial trouble, the other would not be affected. This can help to protect your business interests and money more generally.

On the other hand, there are administrative costs and duties involved with creating a separate company to manage your investments.

Make sure you speak to a professional financial advisor if you’re not sure whether to invest through your limited company or through a separate investment company.

What to do with surplus cash in a business account FAQs

What can you do with company profits?

You have many investment options for dealing with company profits and surplus cash in a business, including stocks and shares, funds, bonds, pension contributions, property, and company-to-company loans.

Can I invest my company money and profits?

Yes, you can invest your company money and profits. Make sure you adequately research any investment you’re considering. Your investment options include stocks and shares and funds.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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