For a lot of business owners, investing their business cash is an opportunity that’s overlooked.
In May, we held a webinar with Sage’s Chris Downing and InvestEngine’s Head of Investments, Andrew Prosser, to explore the opportunities in business investing.
At the end of the session, we opened up questions to the floor to get Chris and Andrew’s expert insight on all things investing business cash.
Here, we’ve compiled the key questions and answers from the session.
Who can open an InvestEngine Business Account?
Andrew: “Limited companies and partnerships. Those are the two company structures that we’re set up to open accounts for. If you run another business, like a sole trader, then it’s best to get in contact with us and we can discuss your options.”
What sort of businesses should consider investing?
Chris: “It comes down to businesses which have a relatively stable cash flow, so you have that element of certainty. So, if you’re a business where you have huge fluctuations in terms of trade or whether your income streams are coming through, it’s a case of having a really good handle on your finances and business planning.
“However, if you’ve got a business with regular customers paying you, you’ve got a good cash flow, maybe in the service industry etc., you’ll have a pretty good degree of certainty in terms of your VAT returns and profitability. In this instance, you can manage quite happily in terms of what surplus cash you’ve got. It comes down to the difference between profitability and cash outflows. You may have a business which is actually quite profitable, but if you’ve got quite a bit of debt, you’ve got assets on hire purchase or you’ve got loans, you need to be thinking about not only your profitability but the cash you need to pay off those debts as well.
“So, it’s not just about the business type, it’s actually your business’ trading situation and your overall balance sheet. Are you on top of your business finances? How regularly do you reconcile your bank? How regularly do you review your financial position with your accountant or bookkeeper? Do you know how much you’re paying on a monthly basis on hire purchase and loans? That way, you have a really good idea of what your surplus cash is on a monthly basis.
“You can then think about how much of that you might want to put into an investment portfolio and how much you should be putting to one side for taxes. If you know what your corporation tax liability is going to be, let’s call it £40,000, you know you need to be putting aside £3,000 every month to save for that. In theory, this is something you could get a better return from.”
How does tax reporting work with Business Accounts?
Andrew: “At the end of the tax year, InvestEngine will provide you with two reports. The first is a consolidated tax certificate, a CTC, which shows the interest income and the dividend income that your portfolio has earned.
“The second report is a capital gains tax report. This shows the realised gains and losses on the ETFs in your portfolio. Both of those reports are for the 12 months ending the 5th April, so it’s perfect for completing your tax return. You can also, if you want to, go into your account and generate customer reports and statements.”
From an accounting perspective, how should money that has been invested be categorised on the accounting software?
Chris: “Imagine you’ve got £10,000 in your bank account, that is a balance sheet item. If you then invest that with InvestEngine for example, that’s effectively another bank account, in simple terms. It’s an asset of the business. So, within the accounting software you create another cash or bank account, for simplicity.
“That way, it’s much easier to account for the transfers in and out and it’ll be dealt with as a balance sheet item. Then, when it comes to returns (if you receive dividends, for example), there will be movement on that account and it’ll be treated as interest or dividends received within a profit/loss account. It’s relatively straightforward accounting.”
How much cash would a business ideally invest?
Andrew: “This is a difficult one to answer because it does depend on the business. I guess the first thing to point out would be that our minimum is £100, so the investment account is meant to be an option for all businesses, no matter the size.
“Given the high returns on offer from money market funds versus banks, I think it’s a great way to park your cash reserves for short-term liquidity needs. For longer-term investing, I think the best way to think about it is the little-and-often approach. If you set up an automated schedule for your investments using InvestEngine’s Savings Plans, investing a little bit every month or every two weeks, it’s a really good way to do it because you end up not having to think about it.
“You want your investments to be set-and-forget, so you can leave them to compound away in the background, generating nice returns, and only touch them again when you need the cash. Given that you don’t need huge amounts of cash to get started, I’d say this little-and-often approach is best.”
How is dividend income taxed for corporation tax purposes?
Chris: “So, if you’ve got dividend income from investments, that is effectively like interest. From a company perspective, you’ll be taxed at normal trading rates. If it’s a personal account, this is where you then have the dividend allowances, which is now £500 in the 2024/25 tax year as an individual.
“From a company perspective, it’s the same as the corporation tax rates.”
As a director of a company, can I loan my company a lump sum to invest for the company?
Chris: “The answer is yes, because as a director of a limited company you can loan money to your business. It’s like any bit of investment, it’s a liability that the company has to you. The important thing in every situation is, depending on the shareholders agreement, you have that documented. Like everything, speak to your accountant with regard to your personal situation.”
Some savings accounts are around 4%. Will InvestEngine ever have a similar savings account?
Andrew: “In terms of like-for-like savings accounts, I would say stay tuned. I can’t say anything right now. But, what we’ve been talking about in terms of the rates on offer from money market funds is a really attractive alternative to the likes of savings accounts.
“I know that a lot of savings accounts not only have lower rates than money market funds – competitors are around 4.5% but money market funds at 5.2%. They track the base rate a lot more closely so, when rates rise, you’ll get the full impact of that rate rise a lot sooner.
“What a lot of banks do is track the reduction in interest rates on the way down, but when the rates start being hiked again they have an incentive to not track the increase quite so closely. So, in terms of de facto savings accounts, we don’t have anything like that at the moment, but a money market fund is an excellent liquid, safe, higher returning option.”
What cash should businesses actually be investing?
Andrew: “In money market funds, you could be investing anything that you’d normally keep in a bank account, so any sort of near-term expenses and liabilities.
“In an investment portfolio of stocks and bonds, you should only be investing cash that you don’t need for the next five to 10 years. If you think you’ll need the cash in, say, five to seven years, then you need to be on the safer end of that stock/bond continuum.
“If your goals are quite far into the future, so you need the cash in 10+ years, you can be in a higher risk portfolio with mostly stocks. Bear in mind that, over the course of your investment, you will see larger losses. But, because you have that nice long timeframe, you have the ability to wait and your portfolio will recover and you can generate those higher long-term returns that stocks offer.”
For all other questions you may want answered, get in touch with our team at support@investengine.com.
Important information
Capital at risk. The value of your portfolio with InvestEngine can go down as well as up and you may get back less than you invest. ETF costs also apply.
This communication is provided for general information only and should not be construed as advice. If in doubt you may wish to consult a professional adviser for guidance.
Tax treatment depends on personal circumstances and is subject to change, and past performance is not a reliable indicator of future returns.