How to Make the Cash in Your Business Account Work Harder For You
Lottie Kent, True Financial Design Ltd.
For those businesses with some cash build up it can be frustrating to see it accrue next to nothing in terms of interest. In this article we teamed up with Lottie Kent from True Financial Design look at a few ideas which could help make your cash work harder for you.
Getting The Best Return On Your Cash
Many companies hold cash on deposit as they have no immediate plans for it which means over the years substantial sums tend to build up. But given falling interest rates and rising inflation option is becoming less attractive, so here are a few ideas things that may help.
Many clients I speak to can’t be bothered to move their money around to achieve an extra 0.05% a year. However, there is a fantastic service that can optimise a cash portfolio to either improve returns, protection or liquidity, which we have just started using for our clients. The best part is, it is a super simple process and the rates are much higher than you would expect.
As of 12th August 2020, the highest rate for an instant access corporate account was 0.90%. But if you do not need access to that money for 3 years and are happy with the reduced liquidity, a rate of 2.00% per annum (rate as of 12th August 2020).
This service not only ensures you are receiving the most competitive return on your cash deposits within the company, but also means that you will receive depositor protection. For example, the FSCS currently protects cash deposits of up to £85,000 per person per financial institution.
Do You Need to Keep The Cash in the Company?
The majority of business owners are always looking at ways to reduce their corporation tax bill but don’t want to compromise their standard of living both now and for their future.
What many business owners do not know is that making a pension contribution directly from a limited company is classed as a business expense.
By paying into a pension directly from your limited company you reduce the taxable profits and therefore your corporation tax liability. As an example, if you made a £20,000 pension contribution from your company in the tax year 20/21 where the corporation tax rate is 19%, you would save £3,800 in corporation tax. You can then access this money just as you would any other personal pension when you get to retirement age (at present you can access your pension from age 55).
There are a number of different investment options for a company, however, selecting one that offers a full range of benefits can prove difficult.
One option that we use with our corporate clients is an onshore investment bond for a couple of reasons:
- No ‘surrender penalties’ – although a bond is seen as a medium to long term investment, directors can access it without any penalty or having to leave it invested for a fixed term – they can get their money when they need it. Although the bond itself won’t suffer any surrender penalties, it’s important to remember that some funds might. That said, we would always recommend that when you invest any money, you do so for a period of 5 years or more.
- ‘Basic rate credit’ mechanism – tax rules give recognition to the fact that UK bonds will have suffered life fund taxation. In the year of surrender, as the tax has already been paid in the bond, a ‘basic rate credit’ is applied which is offset against the Corporation Tax liability in this year – so no tax to pay. This is only the case if the company uses Historic Cost Accounting rather than Faire value accounting.
Many of you will have heard of Prudential. Prudential manage the largest With Profits fund in the world which you can access through a corporate investment bond. At date of writing (17th August 2020) the expected growth rate for their PruFund Growth Fund was 5.70% per annum. A bit better than 0.05% many business owners are receiving on their cash deposits!!
I have touched on a few areas here which I hope you find helpful. If you would like to discuss any of these areas in more detail or would like to review what options may be most suitable for you and your company, please contact me using the contact details below.
The value of investments and the income from them may go down. You may not get back the original amount invested.
Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from taxation, are subject to change.
A pension is a long term investment, the fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
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Chartered Financial Planner
True Financial Design Ltd
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