How to Manage a Cash Surplus in a Limited Company

Explore our overview of the options available to you – including how to invest money – if you have a cash surplus built up in your company.

The first point to consider is how much of the company’s cash is surplus and how much needs to be retained in the company to pay the various liabilities as they fall due.

Whilst your first inclination would most likely be to look at the company’s bank balance, this alone does not show how much cash is genuinely surplus. Before using or extracting funds, the company should prepare an up-to-date assessment of its cash position, liabilities, expected tax payments, working-capital requirements and distributable profits in order to assess what may safely be treated as surplus.

Once you have ascertained the company’s profits you have the following options available to you:

1. Do nothing
2. Use high-interest accounts/bonds
3. Take a loan from the company
4. Distribute the funds as dividends
5. Make company pension contributions
6. Invest in stocks and shares, commodities or cryptocurrencies
7. Invest in rental properties

This is obviously not a comprehensive list of options but does include the main areas that will be of interest to clients. Each option is explained in more detail below.

1. Do nothing

This option is pretty self-explanatory and involves doing nothing with the company money other than leaving it in the company account where it may earn interest (probably at very low levels in the current climate.)

2. Utilise Savings Accounts/High-Interest Accounts/Bonds

This option takes the ‘doing nothing’ option one step further.

Firstly, a standard business savings account would allow you to earn a certain amount of interest on the cash reserves in the company and indeed, this could be used to separate funds that are earmarked for taxes and make ‘a little extra’ until these become payable.  

If reserves are particularly high then spreading funds across different banks can also ensure that all company funds are protected by the FSCS, whereby the first £120,000 of any funds held with a bank are guaranteed by the government. 

If you have no immediate plans to use the company’s cash you could put it on deposit in a high-interest account or company bond. Normally, you can secure a higher interest rate by agreeing to tie the funds upon deposit for a specific period of time (30 days, 90 days, 6 months, one year, etc.). You should, however, remember that once deposited the money is tied up for the whole period and there are normally penalties for wanting to withdraw the funds before the settlement date.

You may be considering these two options as part of your exit strategy for the future. Many people will accumulate retained profits in the company and distribute these as capital upon closing the company down as this can sometimes have tax advantages in the form of a lower rate of tax compared to dividends.

3. Take a loan from the company

This option requires careful consideration due to the potential tax consequences, including beneficial loan and section 455 implications where applicable. In certain circumstances, however, it can be used to good effect. Please refer to our Director’s Loan and S455 guidance for further information on the tax implications of these.

4. Distribute as Dividends

Instead of retaining the profits in the company, you may want to declare them as dividends.

Dividends at the basic rate of tax are taxable at 10.75% for 2026/27 as opposed to 20% for employment income etc. Once your overall income exceeds the higher rate threshold of £50,270 then dividends would be taxable at a rate of 35.75% as opposed to 40% for other forms of income and 39.35% as opposed to 45% once you reach the additional rate of £125,140.  

Further to this, once your overall income exceeds £100,000 the tax-free personal allowance is reduced by £1 for every £2 that your income exceed this.

For many owner-managed companies it can be tax efficient to utilise the personal allowance and the basic rate tax band each year, although the optimal extraction strategy will depend on individual circumstances. Should you declare dividends in excess of this, the rate of tax does increase significantly, and this becomes less efficient, however the tax on dividends is still at a lower rate than for other sources of income.  

5. Company Pension Contributions

Planning for retirement? Company Pension contributions may be for you.

Your company can make pension contributions directly into your pension fund whether it be a stakeholder scheme or a SIPP and these are normally deductible for Corporation Tax purposes provided they are incurred wholly and exclusively for the purposes of the trade and meet HMRC requirements. They should also be National Insurance free which can make them quite a tax-efficient method of extraction; albeit one that ties the monies up until retirement.

As Caroola Accountancy is not authorised to provide financial advice, we recommend speaking with a suitably qualified Independent Financial Adviser before establishing or making significant pension contributions. We would be happy to introduce you to one of our trusted pension specialists if required.

6. Invest in Stocks and Shares, Commodities or Cryptocurrencies

Want to try and earn an additional income for the company? Looking at stocks and shares? Commodities perhaps? If this is a route you intend to go down, then great care needs to be taken before committing yourself to an investment strategy as these investment areas do carry an element of risk. For this reason, it would be advisable only to invest funds that are surplus to the company’s foreseeable operational and tax requirements, recognising that the value of investments can go down as well as up.

Normally it is slightly more tax efficient to make investments personally because you will receive an annual exemption (£3,000 for 2026/27) in which your capital gains would be tax free; companies do not receive this. Prior to 2018 companies could claim Indexation Allowance which mitigated against increases in the value of assets due to inflation and this is still available for the disposals of any assets purchased prior to 1st January 2018 but not for any assets or investments purchased after this date.

Substantial investment activity can affect whether the company is regarded as a trading company for tax purposes, potentially impacting future eligibility for Business Asset Disposal Relief (BADR) and other reliefs.

You should also consider the implications if your company was deemed to be a closed investment company; this is unlikely to be the case but would be the case if the company was not ‘wholly or mainly’ a trading company. If this was the case all profits would be subject to the main rate of Corporation Tax; you would not be eligible for the small profits rate or marginal relief.

7. Invest in Rental Properties

You may be considering diversifying from your regular trading activity and looking to invest in buy to let properties. Whilst this can be done via your limited company, again this would be treated as investment activity and could affect the company’s trading status and hence your eligibility to BADR. A further consideration is that should you wish to close your company, then you would need to liquidate any assets owned by the company, which would include selling any rental properties held by the company.  

An alternative to this, and one which can still utilise a cash surplus in the company is to set up a separate Special Purpose Vehicle (SPV) company for the property and loan funds from your main company to this in order to finance the initial acquisition and set up costs. 

Specialist tax advice should be obtained before transferring funds, properties or existing business activities into an SPV structure.

In conclusion 

In most instances, protecting the company’s status as a trading company will be advantageous in terms of tax efficiency when closing the company and this can limit your options for putting a cash surplus to work, although there are options available. If you would like to discuss your surplus position and options available, get in touch.