Before you begin…
Is your business profitable? This may seem obvious, but it is surprising how many business owners do not know how profitable their business is. It is important you understand what is and is not working in your business before you even think about investing. This is easy to do for those using cloud accounting software so long as you are keeping your data up-to-date; for those not using online bookkeeping, it is something to think about if you want to keep a tighter handle on your business’ finances.
Once you are clear on your business’ position you can then begin to think about whether investing will be beneficial for you and your company.
Ways to invest
There are several ways you can look at investing in your company:
- Through savings in one lump sum
- Re-mortgaging
- Private borrowing
Investing via your personal savings
Lending your company money via your savings account benefits both you and your company. This is because if your company is borrowing or plans to borrow in the future, annual interest for an arranged overdraft starts at around 5% for low risk companies, but for small businesses, especially start-ups, the rate can easily be double that. In addition to these costs you need to take into account arrangement fees and bank charges, which easily add up.
Therefore, instead of your company borrowing from a bank, what if it borrowed from you? It is possible to set up your savings account as an overdraft facility for your business. This means you can then charge your company interest which can be equal to the total of bank charges, and so long as the amount is similar, HMRC will not object to the arrangement.
How this works
For tax purposes you will enter into a “loan relationship” with your company. The interest you charge will not be directly deductible from its profits, which does limit the situations when interest can be deducted, but as long as your company makes a taxable profit there is no problem (hence why it is so important to know how profitable your business is from the outset). It also means that instead of your company paying interest to a bank, it pays that interest to you, whilst saving corporation tax (CT) on the interest it pays.
The interest you then receive is classed as savings income and taxed the same way as interest paid by a bank. This means it qualifies for the savings zero rate band (savings allowance (SA)) of £500 for higher rate taxpayers and £1,000 for basic rate payers. If you are not currently using all your SA, then lending to your company will be especially tax efficient. Even if you fully use your SA, the tax efficiency is better than that of dividends.
It may also be possible to take advantage of the 0% starting rate of tax that can apply to savings income of up to £5,000. This rate can only be obtained when “non-savings” income, such as salary, pensions, rental income etc. is within strict limits.
To find out if investing via your savings account is feasible for you and your business, contact me at lee.manning@raffingers.co.uk.