View more on these topics

Cash injection

My family owns a small medical research company that specialises in wound healing. Currently, the corporate bank account holds an amount much higher than we require. What options does the company have to make more effective use of this cash? What else should we look for in planning terms?

When companies have excess cash, there are many choices available. The obvious ones are increasing salaries or paying a bonus, paying dividends to shareholders, improving the workplace, introducing or increasing employee benefits such as pension contributions, recruiting more employees, keeping the cash holding, reinvesting in the company or expanding the business.

Any allowable acquired asset will be included in the trading and profit and loss calculations within the accounts and will depreciate in value for these purposes. Business assets could include items such as computer equipment, motor vehicles, fixtures and fittings.

If cash is kept on deposit, interest is subject to tax. The current corporation tax rates are shown in the table (right). But with deposit account returns at a 40-year low, it does not make sense to hold big amounts of cash on deposit.

Payment to directors in the form of dividends helps avoid Class 1 National Insurance at the current rate of 11.9 per cent plus employee NI. Historically, dividend payments have restricted pension contribution levels but after the introduction of the stakeholder regime, which lessened the need to generate net relevant earnings in order to make reasonable pension contributions, this is no longer a major consideration.

Alternatively, the company can make additional contributions into an occupational pension scheme or to a lesser extent into a stakeholder or personal pension. The most effective way to maximise contributions will depend on the company&#39s existing arrangements as well as those of the individuals. Factors such as past service, age, existing provision and salary levels will be important in determining the appropriate type of arrangement. Also, the company could fund a stakeholder for low earners or individuals could fund stakeholders for family members.

All pension contributions paid by the company are deductible against taxable profits and no NI falls due on the employer or employee. For directors, the benefits of self-invested personal pensions are becoming clearly obvious as the burdens on occupational schemes increase.

If the pension route is not attractive, corporates can invest in virtually the full range of investments. It may be tax advantageous for the company to invest in its own name, instead paying extra salary or dividends to a higher-rate taxpaying director who annually utilises his capital gains tax exemption. If the company invests in unit trusts, Oeics or stocks and shares, any gains and dividends will be subject to corporation tax while indexation remains available on the gains.

The taxation on investment bonds is a little more complex. Tax legislation allows that individuals should not pay basic-rate income tax on gains from an onshore investment bond. Companies do not receive the same double-taxation protection. The underlying funds are taxed and any gains are subject to the applicable rate of corporation tax. However, the 5 per cent a year tax-deferred withdrawal can be taken and any gain may be able to be offset against any corporate loss.

Offshore bonds fare a little better for, as well as the 5 per cent withdrawal being available, all growth will be free of tax on income and capital gains. Alternative investments could be explored if required.

The company should also ensure that its basic financial housekeeping is in shape. Are deposit accounts competitively interest-bearing? Are bank charges reasonable? Are VAT and PAYE arrangements in order? Are all members of staff aware that they can receive personal financial advice, often facilitated in the workplace?

Is an appropriate range of employee benefits available? With falling life cover rates, corporate clients are often surprised at the low cost of keyperson, share or partnership protection. Are business owners aware of the tax rules surrounding corporate capital gains? Has a retirement route been agreed for older directors?

Many business owners still hang on to the belief that their business is their retirement fund. I have seen many businesses fail through no lack of effort from the owners. When there are profitable times, proper financial planning followed by regular reviews can pave the way for a profitable corporate future.

Recommended

Newcastle loan can count on the family

A new mortgage from Newcastle Building Society lets homebuyers borrow well over what would normally be possible on their salary by allowing family members to guarantee the loan.Its guarantor mortgage is designed to tackle the finan-cial barriers faced by young professionals trying to buy a property.Newcastle says many professionals are on a typical starting salary […]

Platform Home Loans two-year discount

Platform Home Loans two-year discountDiscounted term: Two yearsDiscount: 1.5% discount until April 1 2004Payable rate: 5.375%Minimum loan: £25,001Maximum loan: 95% up to a maximum of £500,000Income multiples: 3.5 plus one or 3 x jointArrangement fee: £395 added to loanRedemption fee: 6% in first year, 6% in second, 5% in third, 4% in fourthConditions: NoneIntroducer’s fee: […]

What&#39s it all about, FSA?

More than a month after the publication of CP121, confusion still surrounds much of what the FSA is trying to achieve.One proposal, included almost as a throwaway line in the document, has left the industry perplexed.The industry is demanding that the FSA clarifies what an authorised financial adviser is going to be – multitied, independent […]

Booklet will help IFAs into business insurance market

Canada Life is publishing a guide for IFAs looking to tap into the business insurance market.The life office says penetration in this market is possibly as low as 5 per cent of the 1.5 million potential firms needing cover, offering a solid opportunity for IFAs looking to expand.The guide, Protecting Business Wealth, includes details of […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment