Although many companies are facing difficult times, some have managed to accumulate a sizeable amount of cash in their business's current account. Leaving this cash where it is brings with it the impact of inflation eroding the amount, together with potential tax problems when withdrawn by the director, including sometimes being taxed at a high tax rate. Paying off any loans should be a priority, as should ensuring compliance with HMRC payments. If the company plans to expand, acquire another business or hire additional staff, retaining cash may be necessary.

However, should the cash not immediately be needed, in the short term transferring the funds into a company savings account with a good rate is advisable. Interest rates are competitive, with one provider offering an interest rate of 4.5% However, interest income is subject to corporation tax’ which could result in a net rate of only3.38% if the company's tax rate is 25%.

· Retaining cash

Should the director shareholder be nearing retirement, tax planning may involve retaining the cash to withdraw at a future date when their marginal tax rate may be lower than that applicable if the cash is withdrawn whilst a director.

If the intention is to sell or liquidate the company, consideration should be given to the availability of Business Asset Disposal Relief (BADR), under which qualifying disposals are taxed at a capital gains tax rate of 14% (18% for disposals on or after 6 April 2026), rather than 24% (higher and additional rate taxpayers).

One condition for BADR on share sales and company liquidation distributions is that the relevant company must be a trading company during the relevant period. HMRC’s Capital Gains Manual CG64090 (Business Asset Disposal Relief: trading company and holding company of a trading group – the meaning of "substantial") states that a company can have some non-trading (typically investment) activities without affecting its qualifying trading status, provided the non-trading element is not ‘substantial’. However, if the company holds a large amount of cash, HMRC may question whether

the company was really trading. The only relevant (non-binding) tax case precedent in relation to cash balances is Potter v HMRC [2019] UKFTT 554 (TC), where the company's trade went into a semi-suspended state and approximately £800,000 of its ‘accumulated reserves’ were ‘safeguarded’ by putting them into mid-term bonds generating interest income of approximately £35,000 a year. The Tribunal concluded that, despite the temporary suspension becoming permanent, the company's activities remained wholly trading.

· Alternatives to retaining cash – pension contributions

Making pension contributions is the main way to withdraw cash tax efficiently. The company can pay contributions on the director's behalf (as long as sufficient annual pension allowance is available) and the company deducts the cost of the pension contributions in calculating its taxable profits. Even if the director plans to retire in a few years, surplus cash can be deposited in the pension scheme and at least some can be withdrawn tax free (25%).

The general rule is that you can contribute to a registered pension fund and receive income tax relief each tax year but only up to certain limits. Any excess over the limits paid into the fund is subject to a recovery charge .

For a company director, the business can contribute directly to their pension scheme up to £60,000 a year even if the company's profits are less than this amount. Contributions exceeding this limit are subject to a tax charge.

· Alternatives to retaining cash – invest in shares’

Although investing in shares, etc is not a guaranteed way of increasing capital, history shows that the return is typically better than investing in a deposit account.

· Alternatives to retaining cash – invest in property

Extracting cash from one company to lend to another for property purchases is a common tax-efficient strategy of cash withdrawal. A separate company, known as a special purpose vehicle (SPV), is incorporated to acquire a property, be it residential or commercial, both companies sharing the same shareholders. The trading company then lends to the SPV company, which uses the cash as funding for the property purchase.