Corporate investing: what is it and how could it benefit your business?
As a business owner, you may have found yourself in the exciting position of having surplus cash in your business. Once you’ve paid the bills, you might be wondering what the most sensible course of action is for getting the most out of the lump sum you now have access to.
The good news is there are several tax-efficient ways you could use this cash to benefit yourself and the business. You could:
- Invest it into your pension
- Build up your emergency cash reserves
- Reinvest the money back into your business
- Take the cash as salary or dividends.
Perhaps a more adventurous option would be to dip your toes into the world of corporate investing.
Corporate investing could be a helpful way to generate positive returns on your surplus cash
While corporate investing might not be the first thing that pops into your head for using your surplus cash, it may be an option worth considering. It has three key benefits:
1. Reduces tax liability for you and your business
Withdrawing money as salary or dividends can be expensive for you and your business. Salary is liable for National Insurance contributions (NICs) for both the business and you as an individual, as well as higher rates of Income Tax than dividends. However, while dividends may reduce the Income Tax liability for you, the profits are subject to Corporation Tax.
For these reasons, corporate investing could be a tax-efficient way to use those surplus profits.
2. Long-term returns on global equities are usually higher than cash accounts
Investing in global equities can give your money greater potential to generate high returns than it might have in easy access business savings account.
According to a report by Business Insider, the S&P 500 index has generated an average annual return of 10.7% since it was founded in 1957. This number rises to 14.7% when you consider the average annual return of the past decade.
Of course, past performance does not guarantee future performance, and the returns vary significantly from this average each year. But over the long term, these fluctuations usually even out to reveal a trend of positive returns.
By comparison, even with the sharp increases to the base rate since 2021, Moneyfacts reports that the highest interest rate that you could get on an easy access business savings account as of 10 May 2023 was 2.65%.
This shows just how much more potential corporate investing could offer than an easy access savings account.
3. Corporate investing can be a helpful way to build up additional income streams for your business
Investing in stocks and shares offers compelling benefits, particularly when it comes to receiving dividend income from those investments.
One significant advantage is the tax treatment of dividends, where they are deemed to have been taxed already. This means that the dividend income you receive from your investments is tax-free, allowing you to reinvest those funds and compound your returns.
By harnessing the power of compounding, you can accelerate the growth of your investment portfolio over time.
This tax-efficient strategy not only boosts your overall returns but also provides a valuable opportunity to reinvest and potentially increase the size of your investment, all while enjoying the benefits of tax-free income.
You should carefully consider the risks involved before investing
Just like any other kind of investing, corporate investing does come with some risks.
Your capital is at risk
The nature of the stock market means that the money you invest in stocks and shares is at risk. The value of your investments can go down as well as up, so it’s important to be aware of the risks to your money before you make any investments.
As a business owner, you may already have a good understanding of your own personal attitude to risk. So, draw on this knowledge when building your portfolio to ensure that your investments are appropriate for you.
Corporate investing is a long-term strategy
Investing is usually described as a long-term strategy, so it’s important to only invest money that you don’t need access to.
Leaving your money invested for the long term is one way to give your money the potential to generate positive returns. So, before you decide to proceed with corporate investing, it’s sensible to ensure you have sufficient cash reserves to draw from in the event that you need to fund an unexpected bill or an increase in costs.
The tax liabilities related to investment returns can be complex
While corporate investing can be a tax-efficient way to make use of the retained profits your business has generated, the specific tax liabilities of the investments you make may differ depending on what you choose to invest in and the size of your company.
Get in touch
As you can see, corporate investing could be a helpful way to use your retained profits. But it also comes with inherent risks that can be tricky to navigate.
It may be helpful to seek professional advice to help make the right decision for you and your business. If you’d like to learn more about whether corporate investing might be a good option for you, we can help.
Say hello to us [email protected], call us 0161 541 2826 or submit a contact form on our website.
Please note
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.