A cash surplus is the extra cash that your limited company retains that exceeds the amount that is required for day-to-day operations. When you have a surplus, it’s important that you consider what you will do with it and how much money the company needs in order to pay its various liabilities. If you don’t leave enough money in the business, not only will it cause problems within the business itself, but it would result in issues arising when Corporation Tax, VAT and PAYE is due. 
There are a number of things that you could do with the money. Firstly, you could simply leave it in the account so that it's there for when the business needs it. In the time that it’s in there, it will earn interest (albeit a low level of interest) which could be utilised in the future. 
 
But that’s not the only thing that you could do with the surplus. Read on to find out other ways you can manage extra cash in the company... 

Take a director's loan 

This move should be thoroughly considered before you do this. A director’s loan is an amount that a director borrows from the company. Although this will prove to be useful in the short term, it’s clear that a DL comes with many tax limitations. It can also result in the director having to pay back the money that the loan is worth themselves if the company goes into liquidation. 

Gift it to a charity 

If you give the cash surplus to a charity, it might be considered as a tax-deductible expense. Before doing this, however, it’s advisable to contact your accountant to ensure that the business itself does not require the surplus and that it can continue to be fully operational. 

Invest the surplus in shares and stocks 

If your limited company is looking for additional income, investing the surplus in stocks and shares is a good business move. However, this particular strategy should be taken carefully and the risk that comes with investing should be considered. The money that’s invested should be an amount that the business can afford to lose if the investment fails, and not invest money if losing it could potentially cause significant damage. 
 
It’s good to know that if you make investments personally, it’s more tax-efficient than if you are investing them with a cash surplus. HMRC will allow for an annual exemption of £12,000 which includes tax-free capital gains. Companies, on the other hand, don’t have an exempt limit. Businesses do, however, have an indexation allowance which can outweigh the annual exemption (when the investment is held long-term or is significant in size) if the base cost of the investment is increased. 

Pay it out in dividends 

An alternative to keeping the surplus cash within the business is to distribute it as dividends. Although the first £2,000 is tax-free, it’s advisable to declare the dividends that your business has each year added onto your business's overall income - dividends are also generally taxed at a lower rate than a salary of 7.5%. If your total business income exceeds the basic rate threshold of £32,000, additional tax may need to be paid on the dividends (usually 32.5%). So it’s important that before you invest the surplus into dividends, you consider the pros and cons that come with it. 

Use it towards company pensions 

As a limited company, you might offer pensions to your employees. Not only does this benefit the employees themselves, but a great benefit of pension contributions for the company is that they can receive full Corporation Tax relief and they are National Insurance free. Before investing the surplus into company pensions, it’s important to ask for investment advice from your accountant to make sure that you are aware of any limitations that come with it. 

Apply for a high-interest account/company bond 

A great way of managing a cash surplus is to put the excess cash in a high-interest account of company bond. Usually, you will be able to secure a higher interest rate when you tie the funds up for a specific period of time. However, by investing the money in this way, you won’t be able to withdraw the money within the time frame and you might be subject to early-withdrawal penalties. 

Next steps... 

If you have a cash surplus or you think you're going to come into one in the near future, why not get in touch with us today? We can help you find a way to manage your cash surplus and potentially make more from your extra cash. 
 
Book a call with Nicola here, or send us an email. We'd love to chat to you! 
 
 
 
 
 
Written by: 
 
Nicola J Sorrell - 
Effective Accounting 
 
Founder | Xero Champion | IR35 Expert 
Tagged as: Limited Company
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