By Lynne Gowers on 27th July 2015

Good reasons for keeping a cash reserve

As the funds in your business bank account grow, it can be tempting to take money out of your Limited Company to boost your personal finances.

Think twice before you do. To start with, that cash may be needed to cover future outgoings such as corporation tax, National Insurance, PAYE and VAT payments. You may also have annual charges such as subscriptions, insurance premiums and compliance-related obligations due in the near future.

Reasons to keep a cash reserve

It’s good housekeeping to ensure you keep the money necessary to meet these payments in your business account, even if you have incoming payments in the pipeline. The risk you take by cleaning out your business account is that it only takes a late-paying client to leave you short. Then, before you know it, you’re looking at bank charges, penalty fees, interest and personally owing the company money by way of a director’s loan (more on that later).

Even if you are fully up to date with your company’s financial obligations, it still can be advisable to leave funds in your business bank account. Here are some reasons for keeping a cash reserve:

1 – The unforeseen mishap

Your computer crashes fatally, your vehicle breaks down, a supplier chases you for an invoice you’d completely forgotten about. Every day, this happens to someone, somewhere. Be prepared for the unexpected by keeping a contingency fund to get you out of a spot.

2 – The sudden opportunity

Out of nowhere, a great opportunity to win a prestigious client or get involved in a major project pops up. It may mean spending a bit on travel, equipment, hiring people or training to update skills or certifications. Don’t lose out on the chance to grow your business just because you blew the cash on something else.

3 – It’ll look good if you need an overdraft

If you need to ask your bank for an overdraft or a loan, a steady balance in your account will be evidence of good financial discipline on your part. This will make a bank more inclined to lend to you than a regular pattern of zeroing your account whenever you have surplus funds.

4 – Tax planning opportunities

You won’t pay personal tax on any company profits you leave in the company. This means you can decide what tax they’ll be subject to (salary/dividends/capital gain) and which tax year you pay it in. If you declare and pay dividends in March 2016, for example, you’ll pay less tax than if you do this after 5 April 2016).

Alternatively, you can simply leave the money in the company until you close or sell it. In this scenario, it would qualify as a capital gain when you take it out and may qualify for entrepreneur’s relief.

As a Boox client, you’re free to set your target salary, dividends and choose how much cash to leave in your business account. Speak to your accountant if you want to change or discuss your current targets.

Director’s loans

Any money you draw from your Limited Company that you don’t record as salary, dividend, expenses or a loan repayment will be classed as a director’s loan. Depending on how much you borrow from your company, and when you pay it back, a director’s loan could become a taxable benefit. Tax on the benefit applies to loans of over £10,000 for tax year 2015/16. If you don’t repay any loan over £5,000 within nine months (or if you re-borrow the money within certain time limits), you may be liable for advanced corporation tax.

If you decide to invest

If you want to invest some of your surplus cash, here are some of the tax implications of your two main options:

Investing through your Limited Company

Pros: As the company makes the investment, you’ll avoid income tax, national insurance and any risk of capital gains tax (CGT) until you extract any profits. Any losses you make could reduce the tax liabilities of profits made from other business activity.

Cons: You’ll pay corporation tax on any profits you make, and then personal tax when you draw the money from the company. The rate of corporation tax you pay could rise if you invest in non-property assets and make big profits and you could lose the company’s trading status.

Investing as an individual

Pros: You can take advantage of the tax benefits of ISAs, personal pension plans and other schemes not available to Limited Companies.

Cons: You’ll pay tax on the money you take out of the company. Depending on what you invest in and the return on that investment, you may have to pay CGT.

Written by Lynne Gowers
Disclaimer Although we attempt to ensure that the Information contained in this publication is accurate and up-to-date at the date of publication it may not be comprehensive, we accept no liability for the results of any action taken on the basis of the information they contain and any implied warranties, including but not limited to the implied warranties of satisfactory quality, fitness for a particular purpose, non-infringement and accuracy are excluded to the extent that they may be excluded as a matter of law.

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