Is your firm maximising investment returns on cash reserves?

12 June 2024 / Insight posted in Article

Many professional firms are holding historically high levels of cash reserves. In some cases, this is a consequence of conservative behaviour adopted to survive the covid pandemic. In other cases, firms continue to hold significant tax reserves on behalf of their partners. These circumstances present opportunities for both firms and the partners within them to maximise investment returns on those reserves.

Since 2021, the UK has seen a steady rise in interest rates which is great for savers and potentially great for firms who have been active in their cash management.

It is highly anticipated that interest rate cuts will happen in the UK at some stage this year, so how could you lock into those higher rates now, whilst keeping it efficient and safe?

Holding large sums via normal business accounts or personal current accounts will no doubt disappoint you when looking at the interest rate you receive. But did you know that currently, rates in excess of 5%pa are still available to you or your firm?

While holding high levels of cash is not typically good for the long term because of inflation, personal or business circumstances may require you to hold significant cash deposits, for example:

  • To reserve for partners’ future tax payments
  • To manage future liabilities
  • To purchase a property
  • Holding for future investment or acquisitions
  • To provide additional income, or offer protection as an emergency fund

Why use a cash management service?

A good cash management service provides simple and efficient ways to help you maximising investment returns on your cash holdings. One simple application unlocks access to over 60 banks, all managed online through one central account. Perfect for the busy professional, and safe, as payments can only go to or from your nominated bank account.

  • You decide if you need instant access on all of your funds, or whether you want to fix elements for different terms to maximise your return. You can mix and match to suit your circumstances and needs. It’s really easy.
  • You decide how many banks you want to spread your money across, for example keeping everything under the FSCS limit of £85,000 means that all of your money is guaranteed by in the event of a bank failing.
  • You have 24/7 access to a secure and encrypted client portal to view and manage your accounts. Easy to move money around, and back to your main business or personal account.
  • You can get consolidated statements for all your deposit accounts.
  • An annual summary of interest earned, to help make tax reporting simple.

Higher interest rates mean higher tax bills….

For firms there are limited options to reduce tax loss but it’s still worth looking to make your business cash work as hard for you as possible.
For personal cash there are a few things to think about to reduce tax loss, for example:

  • Are you using your annual ISA allowances? This is £20,000 per year, per individual.
  • If applicable, does your spouse pay less tax than you? If yes, you’re probably best to hold cash in their name rather than yours – keep it in the family so to speak, rather than paying more to HMRC.

What’s this I hear about gilts?

You can also think about buying a gilt. A gilt is essentially a loan to the UK Government. It pays a set coupon throughout the term, and then pays back the gilt at £100 when it matures.

The advantage to gilts is that, although the coupon is taxable, any gain is tax free. This means that for a higher or additional rate tax payer the gross yield to redemption can be attractive, and provide you with a risk free return higher than cash.

This is good for future tax bills, or known future expenditure because you can buy a gilt with a known maturity date.

The annualised returns after tax are currently around 4.5%, depending on the duration of the gilt, so comparing that to cash – a higher rate tax payer would need to find an interest rate of 7.5% and an additional rate tax payer around 8.2% per annum.

If you’d like to know more about maximising investment returns through cash management or gilts, please get in touch with our professional firms experts or financial planners.

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