{"id":11238,"date":"2023-12-24T12:50:16","date_gmt":"2023-12-24T12:50:16","guid":{"rendered":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/?p=11238"},"modified":"2024-09-15T15:12:56","modified_gmt":"2024-09-15T14:12:56","slug":"leaving-surplus-cash-in-limited-company","status":"publish","type":"post","link":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/leaving-surplus-cash-in-limited-company\/","title":{"rendered":"Is leaving surplus cash in a limited company a problem?"},"content":{"rendered":"            <div class='post-lastupdated'>\n                <strong>Last updated: 15 Sep 2024<\/strong>\n            <\/div>\n        \n<p>If your limited company is making a profit, you may find that you have surplus cash in the business at the end of your financial year, or company \u2018year-end\u2019. This is excess money beyond what is required to run the business. While retaining extra cash in your company might seem like a good idea, it can present certain problems further down the line.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<p>How you decide to manage this surplus cash is entirely up to you, but there are many good options available, which we outline below. But we&#8217;ll start by explaining what surplus cash is and why it can be problematic to keep this money in your limited company.<\/p>\n<h3>What is considered \u2018surplus cash\u2019?<span class=\"Apple-converted-space\">\u00a0<\/span><\/h3>\n<p>Surplus cash is the additional money you have in your company that exceeds the amount required to run the business. It doesn\u2019t simply refer to the actual cash you have in your company bank account, since most businesses have a certain amount of money earmarked for future use and payments falling due from clients or other sources.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<p>Whilst there is no simple formula, it\u2019s best to consider retained profits to accurately work out how much is needed for working capital and how much is surplus. To do this, you need to forecast your business income and expenditure for the current financial year.<\/p>\n            <div class=\"revolut_shortcode\">\n                <a href=\"https:\/\/revolutbusiness.ngih.net\/daV2kQ\" data-wpel-link=\"external\" target=\"_blank\" rel=\"noopener noreferrer\">\n                    <img decoding=\"async\" src=\"https:\/\/cdn-brand.s3.eu-west-1.amazonaws.com\/assets\/images\/revolut_mobile.png\"\n                        alt=\"Revolut Business & Affiliates.\"\n                        class=\"revolut_shortcode-mobile\">\n                    <img decoding=\"async\" src=\"https:\/\/cdn-brand.s3.eu-west-1.amazonaws.com\/assets\/images\/revolut_desktop.png\"\n                        alt=\"Revolut Business & Affiliates.\"\n                        class=\"revolut_shortcode-desktop\">\n                <\/a>\n            <\/div>\n            \n<p>When doing so, you will need to take into account all business costs and liabilities, including:<\/p>\n<ul>\n<li>mortgage or rent payments<span class=\"Apple-converted-space\">\u00a0<\/span><\/li>\n<li>utility bills and <a href=\"https:\/\/www.qualitycompanyformations.co.uk\/blog\/business-rates-what-you-need-to-know\/\" data-wpel-link=\"internal\">business rates<\/a><\/li>\n<li>stock, supplies, and equipment<span class=\"Apple-converted-space\">\u00a0<\/span><\/li>\n<li>staff wages, including directors\u2019 salaries and employer\u2019s National Insurance contributions<span class=\"Apple-converted-space\">\u00a0<\/span><\/li>\n<li>staff pension contributions<span class=\"Apple-converted-space\">\u00a0<\/span><\/li>\n<li>funds earmarked to pay dividends to shareholders<\/li>\n<li><a href=\"https:\/\/www.qualityformationsblog.co.uk\/wp-admin\/post.php?post=9560&amp;action=edit&amp;classic-editor\" data-wpel-link=\"external\" target=\"_blank\" rel=\"noopener noreferrer\">Corporation Tax<\/a> and VAT<\/li>\n<li>loan repayments<span class=\"Apple-converted-space\">\u00a0<\/span><\/li>\n<li>banking charges and interest<span class=\"Apple-converted-space\">\u00a0<\/span><\/li>\n<li>accountancy fees<span class=\"Apple-converted-space\">\u00a0<\/span><\/li>\n<li>broadband, phone, and software costs<span class=\"Apple-converted-space\">\u00a0<\/span><\/li>\n<\/ul>\n<p>It\u2019s important to remember that not all liabilities are paid in the tax year in which they arise. Most companies have cash accumulating in their <a href=\"https:\/\/www.qualityformationsblog.co.uk\/wp-admin\/post.php?post=4325&amp;action=edit&amp;classic-editor\" data-wpel-link=\"external\" target=\"_blank\" rel=\"noopener noreferrer\">business bank accounts<\/a> to cover such costs, namely Corporation Tax (due 9 months <i>after<\/i> your company\u2019s year-end) and VAT (usually due every quarter). This is why it is unreliable to consider only cash in the bank.<\/p>\n<h3>Potential problems from retaining too much surplus cash<span class=\"Apple-converted-space\">\u00a0<\/span><\/h3>\n<p>Ideally, you should try to retain additional funds in your company to cover contingencies. Three months\u2019 worth of outgoings is optimal. Any more than that can be a missed opportunity to make good use of the money.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<p>More importantly, retaining too much surplus cash can cause problems further down the line with succession planning or selling your company. You could end up facing significant tax liabilities and issues with certain tax reliefs, such as <a href=\"https:\/\/www.gov.uk\/business-asset-disposal-relief\" target=\"_blank\" rel=\"noopener noreferrer\" data-wpel-link=\"external\">Business Asset Disposal Relief<\/a> (formerly known as Entrepreneur\u2019s Relief) and Business Relief (formerly known as Business Property Relief).<\/p>\n<p>If your company has distributable profits of more than \u00a325,000 upon winding up, you will be liable for dividend tax on this income. Depending on your total personal earnings for the year, this could push you into the higher-rate or additional-rate tax bands.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n            <div class=\"hubspot_shortcode\">\n                <a href=\"https:\/\/hubspot.sjv.io\/OrKdGZ\" data-wpel-link=\"external\" target=\"_blank\" rel=\"noopener noreferrer\">\n                    <img decoding=\"async\" src=\"https:\/\/cdn-brand.s3.eu-west-1.amazonaws.com\/assets\/images\/hubspot_mobile.png\"\n                        alt=\"Get Started With HubSpot's Free Tools.\"\n                        class=\"hubspot_shortcode-mobile\">\n                    <img decoding=\"async\" src=\"https:\/\/cdn-brand.s3.eu-west-1.amazonaws.com\/assets\/images\/hubspot_desktop.png\"\n                        alt=\"Get Started With HubSpot's Free Tools.\"\n                        class=\"hubspot_shortcode-desktop\">\n                <\/a>\n            <\/div>\n        \n<p>However, where there is less than \u00a325,000 surplus cash, the distribution of profits will be subject to Capital Gains Tax instead. This may result in a substantially lower tax liability, due to the annual CGT allowance and the potential availability of Business Asset Disposal Relief.<\/p>\n<p>                                                    <a href=\"https:\/\/www.qualitycompanyformations.co.uk\/blog\/how-can-i-sell-my-business\/\" class=\"related\" data-wpel-link=\"internal\"><span class=\"related-title\">How can I sell my business?<\/span><\/a>\n                                                                        <a href=\"https:\/\/www.qualitycompanyformations.co.uk\/blog\/transfer-company-shares\/\" class=\"related\" data-wpel-link=\"internal\"><span class=\"related-title\">How to transfer company shares<\/span><\/a>\n                                                                        <a href=\"https:\/\/www.qualitycompanyformations.co.uk\/blog\/business-asset-disposal-relief-scheme\/\" class=\"related\" data-wpel-link=\"internal\"><span class=\"related-title\">What is the Business Asset Disposal Relief scheme, and is my business eligible?<\/span><\/a>\n                    <\/p>\n<p>With regard to Business Relief when passing on a company (e.g. to your children), HMRC may treat the business as an investment company if there is an excess of surplus cash.<\/p>\n<p>In such instances, you would either be ineligible for <a href=\"https:\/\/www.gov.uk\/business-relief-inheritance-tax\/what-qualifies-for-business-relief\" target=\"_blank\" rel=\"noopener noreferrer\" data-wpel-link=\"external\">Business Relief<\/a> for Inheritance Tax or subject to restricted relief. Without a buildup of cash, the business, shares, and assets would qualify for tax relief of either 50% or 100%.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<h3>10 effective strategies for utilising surplus cash<\/h3>\n<p>If you find yourself in the fortunate position of having extra money in your limited company, it is better to utilise this surplus cash rather than letting it sit idle and accumulate. There are several ways that you can make it work in your favour over both the short term and long term. Let\u2019s take a look at some of these options.<\/p>\n<h4>1. Make early repayments on business loans<\/h4>\n<p>Taking into account how much interest you are currently paying on any business loans your company has, you should consider making early repayments wherever possible. Doing so could save you a considerable amount of money in the long run and also improve your <a href=\"https:\/\/www.experian.co.uk\/blogs\/latest-thinking\/small-business\/what-is-business-credit-score\/?utm_medium=internalRef&amp;utm_source=Consumer%20Services\" target=\"_blank\" rel=\"noopener noreferrer\" data-wpel-link=\"external\">business credit score<\/a>. Remember to check whether any early repayment penalties apply.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<h4>2. Grow your business<span class=\"Apple-converted-space\">\u00a0<\/span><\/h4>\n<p>If you have plans to grow your business in the future, you could put your company\u2019s surplus cash to good use by reinvesting it back into the business. There are several ways you can do this, for example:<\/p>\n<ul>\n<li>opening additional premises in new locations<\/li>\n<li><a href=\"https:\/\/www.export.org.uk\/news\/638756\/New-research-reveals-the-benefits-of-exporting-and-the-challenges-businesses-face.htm\" target=\"_blank\" rel=\"noopener noreferrer\" data-wpel-link=\"external\">start exporting<\/a><span class=\"Apple-converted-space\">\u00a0<\/span><\/li>\n<li>improving your existing products and services<span class=\"Apple-converted-space\">\u00a0<\/span><\/li>\n<li>expanding or diversifying your range of products and services<\/li>\n<li>buying new equipment and machinery<\/li>\n<li>hiring more staff<\/li>\n<li>moving to larger premises to increase capacity<\/li>\n<li>providing training and development opportunities to key employees<span class=\"Apple-converted-space\">\u00a0<\/span><\/li>\n<li>funding a new acquisition or setting up a new business <span class=\"Apple-converted-space\">\u00a0<\/span><\/li>\n<li>improving your marketing strategy<span class=\"Apple-converted-space\">\u00a0<\/span><\/li>\n<\/ul>\n<p>Your company will be able to claim tax relief or <a href=\"https:\/\/www.gov.uk\/capital-allowances\" target=\"_blank\" rel=\"noopener noreferrer\" data-wpel-link=\"external\">capital allowances<\/a> on most types of expenditure incurred in the course of growing the business.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<h4>3. Invest in research and development<\/h4>\n<p>Depending on the industry you operate in and the types of business activities you carry out, it may be beneficial to invest surplus cash in research and development (R&amp;D). This could be a great way to develop your products or services and improve processes and technologies.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<p>An effective R&amp;D strategy is one of the best ways to stay ahead of the competition and build a more resilient and profitable business. You may also be eligible to claim <a href=\"https:\/\/www.gov.uk\/guidance\/corporation-tax-research-and-development-rd-relief\" target=\"_blank\" rel=\"noopener noreferrer\" data-wpel-link=\"external\">Corporation Tax relief on your Research and Development project<\/a>.<\/p>\n<h4>4. Issue dividends<span class=\"Apple-converted-space\">\u00a0<\/span><\/h4>\n<p>It\u2019s not uncommon for new company owners to avoid taking dividends in the early stages, opting instead to leave profits in the business as a buffer. This is sensible, but it is not always the most tax-efficient approach.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<p>Provided there are sufficient retained earnings, issuing dividends to yourself (and other shareholders, where applicable) in each tax year may be the better choice. You can take dividends in addition to, or instead of, paying yourself a director\u2019s salary.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<p>                                                    <a href=\"https:\/\/www.qualitycompanyformations.co.uk\/blog\/issue-dividends\/\" class=\"related\" data-wpel-link=\"internal\"><span class=\"related-title\">How to issue dividends in a company limited by shares<\/span><\/a>\n                                                                        <a href=\"https:\/\/www.qualitycompanyformations.co.uk\/blog\/pay-yourself-through-limited-company\/\" class=\"related\" data-wpel-link=\"internal\"><span class=\"related-title\">How to pay yourself through a limited company<\/span><\/a>\n                                                                        <a href=\"https:\/\/www.qualitycompanyformations.co.uk\/blog\/what-are-the-dividend-tax-rates-in-the-uk\/\" class=\"related\" data-wpel-link=\"internal\"><span class=\"related-title\">What are the dividend tax rates in the UK?<\/span><\/a>\n                    <\/p>\n<p>In the 2024\/25 tax year, there is a tax-free dividend allowance of \u00a3500. Your first \u00a312,570 of income is also tax-free, regardless of whether this comes from salary or dividend payments.<\/p>\n            <div style=\"display: none\"><\/div>\n        \n<p>Depending on your total taxable income for the year, you will then pay dividend tax according to your Income Tax band. This means that you will pay 8.75% tax on dividends if your annual earnings are between \u00a312,571 and \u00a350,270. However, if you are a higher-rate or additional-rate taxpayer, your dividend income will be taxed at 33.75% and 39.35%, respectively.<\/p>\n<p>Where company finances allow, it\u2019s generally advisable to pay yourself at least up to the basic rate threshold each year. And since dividends are subject to lower rates than salary income, it\u2019s better to take the bulk of your annual earnings as dividend payments.<\/p>\n<h4>5. Pay into a pension<span class=\"Apple-converted-space\">\u00a0<\/span><\/h4>\n<p>Whether retirement is on the horizon or a long way off, paying into a pension through your limited company is one of the most tax-efficient ways to extract money from your business and utilise surplus cash.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n                                                    <a href=\"https:\/\/www.qualitycompanyformations.co.uk\/blog\/can-my-own-company-make-contributions-towards-my-pension\/\" class=\"related\" data-wpel-link=\"internal\"><span class=\"related-title\">Can my own company make contributions towards my pension?<\/span><\/a>\n                    \n<p>By making contributions directly from the company, the payments are treated as a business expense, meaning they are eligible for full Corporation Tax relief in the financial year they are paid.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<p>And unlike personal contributions that come directly from your salary, pension payments from the company are not subject to National Insurance. Additionally, there is no limit to how much the company can contribute to your pension tax-free.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<h4>6. Buy commercial premises<span class=\"Apple-converted-space\">\u00a0<\/span><\/h4>\n<p>If you currently rent commercial premises, you could consider putting your surplus cash toward the purchase of a suitable commercial property instead. Whilst not feasible for many small businesses, it may be worth thinking about if you are in a position to do so.<\/p>\n<p>On a smaller scale, you could use extra money to invest in new plant and machinery assets for the business, either to replace less efficient items that the company owns or leases. <span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<h4>7. Carry out a buyback of shares<\/h4>\n<p>Carrying out a share buyback may be beneficial if your company has multiple shareholders and\/or too many issued shares. By doing so, the remaining shares will become more valuable.<\/p>\n<p>Using surplus cash for this purpose may be more tax-efficient than paying dividends on those shares. However, it depends on various factors and can be incredibly complex, so expert advice should always be taken first.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<h4>8. Make charitable donations<span class=\"Apple-converted-space\">\u00a0<\/span><\/h4>\n<p>For an increasing number of businesses, gifting to charity wherever possible is an integral part of their ethos and <a href=\"https:\/\/www.cipd.org\/uk\/knowledge\/factsheets\/corporate-responsibility-factsheet\/#:~:text=and%20further%20reading-,What%20is%20corporate%20responsibility%3F,viable%20over%20the%20long%20term.\" target=\"_blank\" rel=\"noopener noreferrer\" data-wpel-link=\"external\">Corporation Social Responsibility<\/a> policy.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<p>Aside from the benefits this can provide to the organisations or communities you support, your limited company will enjoy tax relief on the charitable donations it makes.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<p>Putting your surplus cash to such use and publicly expressing your support can also help you to attract consciously-minded consumers and highlight the causes that you are most passionate about. <span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<h4>9. Invest in stocks and shares<\/h4>\n<p>Investing in stocks and shares can be a risky business, which is why it\u2019s advisable to do so using only surplus cash. Corporate investing can be a good way to earn additional income for your company, perhaps to fund its growth or purchase new equipment.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<p>However, it\u2019s usually more tax-efficient to make investments from personal funds, rather than through your limited company. As an individual, you will be entitled to the <a href=\"https:\/\/www.gov.uk\/capital-gains-tax\/what-you-pay-it-on\" target=\"_blank\" rel=\"noopener noreferrer\" data-wpel-link=\"external\">Capital Gains Tax<\/a> allowance of \u00a33,000 (2024\/25 tax year) on any profits you make when you sell or dispose of your investments.<\/p>\n<h4>10. Place in a high-interest savings account<\/h4>\n<p>A final option is to simply transfer your company\u2019s surplus cash to high-interest <a href=\"https:\/\/www.money.co.uk\/savings-accounts\/business-savings-accounts-explained#:~:text=Business%20deposits%20in%20savings%20accounts,if%20your%20provider%20goes%20bust.\" target=\"_blank\" rel=\"noopener noreferrer\" data-wpel-link=\"external\">business savings accounts<\/a>. You can usually secure more favourable interest rates by locking in the money for a fixed period. This may be ideal if you have no immediate plans to use the money.<span class=\"Apple-converted-space\">\u00a0<\/span><\/p>\n<h3>Thanks for reading<\/h3>\n<p>Having surplus cash in your limited company is a positive sign (unless it&#8217;s only there because you&#8217;ve forgotten to pay a massive tax bill). However, leaving this extra money in the business is rarely the best decision and may even lead to problems in the future. There are far better ways to use it, many of which could lead to more profits.<\/p>\n<p>How you manage this surplus will depend on your business objectives and personal circumstances. To explore the various options available to you, speak to an accountant or financial advisor for expert guidance. By taking professional advice, you can make informed decisions on how to utilise this money in the most appropriate and tax-efficient manner.<\/p>\n<p>Please comment below if you have any questions about this post, or <a href=\"https:\/\/www.qualitycompanyformations.co.uk\/contact-us\/\" data-wpel-link=\"internal\">contact us<\/a> if you would like to speak to someone about our company formation services.<\/p>\n            <div class=\"names_shortcode\">\n                <a href=\"https:\/\/acn.ionos.co.uk\/aff_c?offer_id=3&amp;aff_id=8964&amp;url_id=309\" data-wpel-link=\"external\" target=\"_blank\" rel=\"noopener noreferrer\">\n                    <img decoding=\"async\" src=\"https:\/\/cdn-brand.s3.eu-west-1.amazonaws.com\/assets\/images\/242634_Domains_Banner-Cooperation_QCF_325x340_UK.png\"\n                        alt=\"FREE .co.uk Domain Name.\"\n                        class=\"names_shortcode-mobile\">\n                    <img decoding=\"async\" src=\"https:\/\/cdn-brand.s3.eu-west-1.amazonaws.com\/assets\/images\/242634_Domains_Banner-Cooperation_QCF_980x150_UK.png\"\n                        alt=\"FREE .co.uk Domain Name.\"\n                        class=\"names_shortcode-desktop\">\n                <\/a>\n            <\/div>\n        \n"},"excerpt":{"rendered":"<p>If your limited company is making a profit, you may find that you have surplus cash in the business at the end of your financial year, or company \u2018year-end\u2019. This is excess money beyond what is required to run the business. While retaining extra cash in your company might seem like a good idea, it&hellip;<\/p>\n","protected":false},"author":28,"featured_media":11244,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false},"categories":[1239],"tags":[],"class_list":["post-11238","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-tax-accounting-finance","category-1239","description-off"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v24.2 (Yoast SEO v24.2) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Is Leaving Surplus Cash in a Limited Company a Problem?<\/title>\n<meta name=\"description\" content=\"Find out what surplus cash in a limited company is and why it can be problematic, including options for managing this cash in your business.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, 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