Key tax dates and deadlines for 2018/19
It is an inevitable reality that, for anyone earning a livin...
By Jonathan London on 13th March 2015
Money left over in your business bank account after paying your contractor salary, dividends, VAT, corporation tax, PAYE and employer national insurance contributions is known as your cash surplus.
This is your money so you are free to spend, save or invest it as you please. Each option however, has its own specific tax implications.
The main benefit of investing surplus cash through your limited company is that, by not paying the money into your personal account, you avoid the personal tax and national insurance liabilities. You also avoid the risk of incurring capital gains tax (CGT), which applies when a personally held asset appreciates in value by £11,000 or more (between 6 April 2014 and 5 April 2015).
Instead, your company will pay corporation tax on any profit realised through the sale of an asset. Depending on your personal tax code and the investment you make, this could be preferable to paying income tax on the money in the first place – then paying again in the form of CGT.
Another advantage of investing through your company is that any losses you incur can be offset against profits made elsewhere in the business.
However, if your business invests in non property assets and they prove highly lucrative, HMRC will consider the company a Close Investment Company (CIC). If this happens your corporation tax rate will rise significantly.
Dividends are the most tax efficient way of paying yourself money from your limited company, but there are still limits as to what you can withdraw before you start paying Dividend Tax.
Also, there are investment opportunities available to you as an individual that are not open to companies. Examples of these are Individual Savings Accounts (ISAs) and personal pension plans. With the government keen for all of to do as much as we can to prepare for our retirements, tax relief on these financial products make a compelling case for investing your cash surplus.
You can, of course, leave the money in the bank as a reserve for a rainy day. It will only be taxed once, so you’ve nothing to fear from HMRC in subsequent tax returns. With current interest rates being very low, however, this is not an investment opportunity.
Investing cash surpluses is a highly individual decision. What’s best for you will depend on the amount you have to invest, your personal tax status, investment opportunities available to you and your appetite for risk.
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