Better Return by Holding Cash Personally?
Newsletter issue - April 08.
If your company has built up some large cash balances you should review the interest rate it is earning on those deposits. Competition between banks means that even business deposit accounts can pay up to 5.5% on deposits of £25,000 or more. The interest rates paid on personal savings accounts can be higher, but you should also consider how much tax you and the company will pay on the interest earned.
From 6 April 2008 you are likely to pay tax at 20% on your savings income, but where your non-savings income, excluding UK dividends, amounts to less than your personal allowance of £5,435, you may pay just 10% on interest received. However, if you are a higher rate taxpayer you will pay 40% tax on interest received. Your company on the other hand will pay tax on interest at a minimum of 21% from 1 April 2008, which will rise to 22% from 1 April 2009. Although if profits exceed £300,000, or you control a number of companies, the marginal corporate tax rate could be as much as 29.75%.
In summary there could be a tax penalty of up to 19.75% (29.75% - 10%) where surplus funds are held within your company rather than in your own name. If you are paying tax at a lower rate than your company it makes sense to extract as much cash as possible, without pushing your total income into the higher tax band. The most straightforward and tax efficient way of extracting cash is as a dividend. Although if there are other shareholders who hold the same class of shares the same rate of dividend must be paid to all those shareholders.
Finally in these difficult times for banks remember the compensation limit for deposits held in UK banks is capped at £35,000 per banking license. So if you hold several accounts with one bank, £35,000 is the maximum compensation you will receive if that bank fails. Also the compensation scheme does not cover deposits made by companies rather than individuals.