Have you got sizeable reserves in your business?  If so, it may be worthwhile considering a Company Investment Account.

With tax changes on the horizon, it’s worth reviewing the way you manage your contracting income to ensure you are working as tax-efficiently as possible.

We’ve written recently about the forthcoming tax changes and discussed ways in which you can take an income tax-efficiently from your PSC/limited company. Another area we regularly talk to our clients about is Company Investment Accounts (CIAs).  These can be a good way to manage any reserves tax-efficiently, especially while inflation and bank interest rates are unusually high.  Let us explain…

What is a CIA?

A company investment account is an account held by your business and can be used to invest excess funds in stocks, bonds, mutual funds and other investment vehicles.  A CIA usually aims to generate a return on money you don’t need immediate access to and the returns can be used to fund new projects or pay dividends.

How does it work?

The process of paying into a CIA may vary depending on the specific investment account and the financial institution managing it.  However, it’s normally a straight-forward process involving a transfer of reserves to the investment account, either one-by-one or as a regular payment.

Investments made through a CIA can be short-term or long-term, depending on the your investment goals and risk tolerance.

Benefits and risks

A CIA can offer several benefits such as earning a return on excess funds, diversifying the company’s portfolio, and funding growth opportunities.  However, there are also some risks such as:

• Market fluctuations – the value of investments in the account may decline due to changes in the overall market conditions.
• Interest rate risk – the value of your investment can be impacted by changes to interest rate risks, particularly those that apply to fixed-income investments such as bonds. When interest rates rise (as they have recently), the value of existing bonds may decline, and vice versa.
• Regulatory risk – changes in regulations and laws can affect the performance of investments and the rules and guidelines that dictate how they are managed.
• Also, you must carefully consider your long-term plans before using a CIA. Under the current Business Asset Disposal Relief (BADR) rules, formerly known as the Entrepreneur’s Relief rules, using a CIA might prevent you from benefitting on the most advantageous tax rates if you wind up your company.  However, with careful planning, it may be possible to manage this risk.

Before setting up a CIA, it’s important to understand and manage all of the risks effectively.  It’s always best to work alongside an independent financial advisor who can provide tailored advice.  Our IFA partners are Contractor Wealth and City Capital Financial Planning, who will be happy to help you.

Tax treatment of CIAs

Any income earned from investments held in your CIS, such as interest and dividends, will be subject to Corporation Tax.  When the investments are sold, any realised capital gains will be subject to tax too, and the rate will vary depending on the holding period and the type of investment.  Also, under the Corporation Tax regime that comes in from 1 April 2023, dividends received from listed investments and similar sources may increase your overall rate of Corporation Tax.

Don’t forget that a CIA is designed to create investment income and returns inside your company, and those proceeds will still need to be passed on to you personally before you are able to benefit from them. Taking money from your company, whether regular retained profits, or investment income, will usually create a personal tax charge, such as dividend tax.

In summary

CIAs should certainly be a consideration if you are holding reserves in your company, and don’t plan to use them in the near future.  With inflation rising and savings interest low, it can be a good way to put your company’s money to work.  However, there are risks and benefits to consider together, so it’s important to take specialist advice from qualified financial and tax advisors.

Speak to Contractor Wealth or CCFP if a Company Investment Account is something you’d like to consider.

Got a tax question?

If you have any questions about tax-efficiency in general, speak to your Workwell accountant.  One of the benefits of choosing Workwell for your contractor accountancy service is that we undertake proactive quarterly reviews as standard to ensure ongoing tax-efficiency, so you need never worry that you are not maximising your income.

Not with Workwell?  Find out about our ready-made accountancy packages and how easy it is to switch accountants, or get in touch to discuss your bespoke needs.