For a micro entity (turnover of £10.2 million or less, £5.1 million or less on its balance sheet and 50 employees or less).
Many companies are lucky enough to have large cash balances in their accounts, perhaps from built up profits, needing emergency funds or capital for future investment and the majority will simply let this build in bank accounts paying very little (if any) interest.
The banks know this and given the tax implications of extracting this money from the business often being great, they will often pay no interest what-so-ever!!
So, what can be done? Some types of investments are recognised as being particularly suitable for business’s and therefore interest and growth is returned to the business “tax paid” ensuring no additional liability to you regardless of being a sole trader, partnership or Limited Company.
Here’s how it works:
- The business invests a lump sum into an on-shore investment bond.
- The provider will be a recognised UK insurance company such as Prudential, Aviva or Legal & General for example.
- The “investment bond” will have an underlying investment that generates the growth (although this depends on your risk appetite as to what investments were chosen).
- The investment bond pays some tax within the fund itself (usually 15-18%) as it grows.
- To simplify your accountancy procedures, you should use “historic accounting” so your balance sheet only reports the original sum invested.
- When you encash the fund, any growth is treated by HMRC to have been paid net (with tax already deducted equivalent to corporation tax or basic rate tax rates).
Other important points:
- Choose an investment bond that has no minimum fixed term or early redemption penalties.
- The funds you choose may fluctuate in value (where invested in shares for example).
- Minimum premiums apply, usually as little as £10,000.
- There will usually be adviser charges to set it up and therefore you should be able to invest for at-least a minimum period of time.
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