Accumulate cash or invest your wealth?
One option that many Contractors take (possibly due to inertia) is to simply allow funds to accumulate in the business. This is low risk (the Financial Services Compensation Scheme guarantees cash deposits up to £85,000 per banking institution so long as you qualify as a ‘small business’) but, consequently generates low returns. If you are prepared to tie the money up for a couple of years and looking to deposit at least, say, £25,000, you may attract an interest rate of 2% which is similar to the current headline inflation rates[1].If you want more flexibility a standard savings account will give you 0.5% at best.
Whilst having large sums of money in the company bank account provides security, interest rates are at historically low levels and below inflation so, in real terms, your capital is being eroded. Investing surplus funds is expected (although not guaranteed) to generate higher returns than cash deposits in the long run. This means accepting some risk and you should not expose yourself to this unless you are prepared to invest for the longer term, which I would define as five years or more.
Corporate or personal investments?
One question new clients often come to me with is “should I take the money out of my business and invest it personally, or invest the company assets directly?”
Extracting significant sums of money from the business in a single tax year will often mean paying tax at the higher rate which, even when drawn as dividends is steep at 32.5%, if not higher. This aversion to paying tax on hard-earned income is compounded by the knowledge that if the cash was left in the business it could be extracted at 10% if you qualify for Entrepreneur’s relief, (something else to discuss with your Accountant).
There is no golden rule here as the ‘right’ answer will depend on a range of individual factors: your age; when you plan to stop working; the size of the investment; how long before you need access to the funds; the level of risk you wish to take; the level of salary and dividends you draw each year; your spouse’s income; whether or not you have children; your other assets etc. These factors will all have an influence on which way you go.
The importance of seeking advice
The most appropriate course of action will depend on many factors, and what is ‘right’ for one individual may be not be for another who may appear on the surface, to be in a similar situation.
A good Financial Planner will take the time to really understand you, your situation and what you want to achieve and translate all this into a bespoke plan that is unique to you. Just because the guy you sit next to in the office was told that investing company assets directly is ‘the best thing to do’, does not mean it is ‘right’ for you. The solution will be highly individual, and you should be guided by a professional.
[1] Retail Price Index in September 2014 was 2.3% and Consumer Price Index in September 2014 was 1.2%
Contact Paul Hyland at Wingate Financial Planning on 0188 333 22 62
