Whilst having a large bank balance represents financial security and flexibility, leaving significant sums of cash sitting idle in the company’s bank account (i.e., more than a contingency or ‘rainy day fund’, or more than needed for expansion or investment) is not always the best long-term strategy.
For example, low bank interest rates can lead to inflation eroding the value of the cash held. There may also be potential tax implications for the company owners when withdrawing the cash, including the possibility of being taxed at a higher rate. So what are some options for company owners to consider, and are they tax-efficient?
Pay Off Company Debt
This may seem an obvious first step; however, the business may be tied to a contract that triggers a ‘break clause’ charge if settled before the end of the term.
For tax purposes, a deduction may be possible for the company under the ‘incidental costs of raising loan finance’ provisions. Whether break clauses are incidental costs will depend on the facts of the particular arrangement; for example, if such charges amount to a premium, they are potentially disallowable. Most high street lenders require such break payments, levied as compensation for the loss of interest. However, should more capital be repaid than originally advanced, that excess falls to be deemed non-allowable for tax purposes when paid to achieve a capital refinancing advantage (e.g., replacing an existing loan with new, cheaper, long-term finance, rather than as part of the ordinary course of trading).
Pension Contributions
Generally, an employee can contribute their earnings into a registered pension fund and receive income tax relief, up to certain limits. Many directors take a modest salary (e.g., £12,570 for 2025/26), which restricts the amount that can be invested.
However, one way to circumvent this limitation is to establish a directors’ pension into which the company makes contributions on the directors’ behalf, without such a restriction on the amount invested. This strategy is an especially attractive method of tax saving for higher and additionalrate taxpayers. There is generally no need for there to be a dedicated company pension scheme to make tax-deductible contributions – most providers of personal pensions allow the company to contribute directly.
Employer pension contributions are considered ‘business expenses’ for the company and, as such, are generally tax-deductible.
Investing in Property
Holding property within a limited company has become popular in recent years, partly due to the restriction for interest and finance costs applicable to residential property owned by individuals (where interest claims are restricted to 20%). Such restrictions do not apply to property held within a company as any interest and finance costs are generally tax-deductible. Any gain on property sold by the company is taxable at corporation tax rates, which may be lower than the director’s personal tax rate. However, withdrawing sale proceeds or any profit (e.g., as a salary or bonus) will be taxable at the director’s highest tax rate.
Unless the property is to be the company’s business premises, great care should be taken to ensure that the company’s trading status is not lost for capital gains tax business asset disposal relief purposes, or for inheritance tax business property relief purposes.
Lending Money to Directors
Directors can withdraw surplus cash as a director’s loan; however, should the loan not be repaid within nine months of the company’s year end, the company must pay an additional ‘section 455’ tax charge (currently 33.75%) on the outstanding amount, which is only reclaimable once the loan is repaid.
Therefore, this option should only be used for a director’s short-term funding needs.
Practical Tip
Before considering withdrawing surplus company funds by whatever means, directors should undertake a thorough review of the company’s current and future cashflow requirements, to ensure that potential liquidity problems do not arise in the future.