Best Business Investment Accounts UK

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.

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.

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.

What to do with surplus cash in a business account FAQs

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.