While many businesses are tightening their belts, some companies have built up significant cash reserves. If your business has a healthy balance in its current account, you might be wondering: Should I leave it where it is? Or is there a smarter, more tax-efficient way to use it?Holding excess cash in the company can be risky from a tax perspective, and it could also mean missing out on opportunities for growth or long-term savings. Here’s what to consider — and what to do next.
Why Sitting on Cash Isn’t Always Wise
Leaving cash idle in a business current account means it’s likely earning little to no interest, while inflation steadily reduces its value.
Worse still, when a director eventually withdraws the funds, they could face high tax charges, particularly if the withdrawal takes the form of dividends or salary taxed at higher rates.
Step One: Cover Essentials
Before doing anything else, it’s important to:
- Repay any outstanding loans
- Ensure all HMRC liabilities (e.g. Corporation Tax, VAT, PAYE) are up to date
- Retain enough cash for day-to-day operations and any planned investments
If your company has expansion plans, intends to hire staff, or is considering acquiring another business, retaining some cash may be necessary.
Short-Term Option: Move Cash to a Business Savings Account
If the cash isn’t immediately needed, consider transferring some to a business savings account with a competitive interest rate. For instance:
- An account offering 4.5% interest may sound attractive
- However, after Corporation Tax at 25%, the net return is closer to 3.38%
Still, that’s better than letting the money sit earning nothing — but it’s not without tax implications.
Option: Retain Cash for Future Withdrawal at Lower Tax Rates
If you’re a director-shareholder approaching retirement, you may benefit from delaying withdrawals.
Once you’re no longer a director or if your personal income drops in future years, you may be able to withdraw funds at a lower marginal tax rate — potentially saving thousands in Income Tax and Dividend Tax.
Selling or Liquidating? Consider Business Asset Disposal Relief (BADR)
Planning to close or sell the company? The way you hold and use company cash can affect whether you qualify for Business Asset Disposal Relief (BADR) — formerly Entrepreneurs’ Relief.
This relief:
- Applies on share sales or company liquidation
- Taxes qualifying gains at 14% for disposals before 6 April 2026, rising to **18% from that date
- Is much lower than the standard 24% CGT rate for higher/additional rate taxpayers
However, to qualify, the company must be genuinely trading, not primarily holding investments. If you’re holding significant cash, HMRC may scrutinise whether your company was really a trading business.
According to HMRC guidance (CG64090):
Non-trading activity must not be ‘substantial’.
Large cash balances could threaten this unless they are clearly linked to trading activities.
Case in point: Potter v HMRC [2019] – A company with £800,000 in reserves held in bonds generating £35,000 in interest was ruled to still be trading. But this ruling isn’t legally binding and each case will differ.
Alternative: Make Pension Contributions
A smart and tax-efficient way to use surplus cash is by contributing to a pension scheme on behalf of the director.
Benefits include:
- The company can contribute up to £60,000 per year
- Contributions are deductible for Corporation Tax
- Up to 25% can be withdrawn tax-free after retirement
- A great long-term option if the director is retiring in a few years
⚠️ Note: Contributions above the annual allowance may trigger tax charges. Always assess available allowances before contributing.
Alternative: Invest in Shares or Stocks
Investing corporate funds into stocks, ETFs, or other financial products may offer better returns than a savings account — albeit with more risk.
- Historically, returns from shares outperform cash savings over time
- However, gains are still subject to Corporation Tax, and you must account for investment risk
This strategy may suit companies with a medium- to long-term investment horizon and a good risk appetite.
Alternative: Invest in Property via an SPV
Another increasingly popular method for utilising surplus company cash is to invest in property through a Special Purpose Vehicle (SPV).
How it works:
- Create a separate company (SPV) for property investment
- Your trading company lends funds to the SPV
- The SPV then purchases residential or commercial property
Benefits include:
- Cash is used for capital growth
- Tax-efficient structure for directors who are shareholders in both companies
- Helps retain BADR eligibility by keeping property investments separate from the trading business
Final Thoughts
Too much cash in the company might seem like a nice problem to have — but it can actually lead to lost opportunities, higher tax bills, or even complications with Business Asset Disposal Relief.
By planning ahead, you can:
- Reduce your Corporation and Income Tax bills
- Preserve BADR eligibility
- Build personal wealth through pensions or investments
Not sure which option is best for you? At Yorkshire Accountancy, we help business owners optimise surplus cash, minimise tax, and plan for the future. Whether it’s pensions, investments, or planning a tax-efficient exit — we’ve got you covered.
Partner note:
Potter v HMRC [2019] UKFTT 554 (TC) https://www.bailii.org/uk/cases/UKFTT/TC/2019/TC07348.html
HMRC Guidance:
https://www.gov.uk/guidance/who-must-pay-the-pensions-annual-allowance-tax-charge
HMRC Capital Gains Manual 64090 – Business Asset Disposal Relief: trading company and holding company of a trading group – the meaning of “substantial”
