Guide to business savings accounts
With a business savings account, you could earn interest on your spare cash and set money aside for the future.
Do you have a savings account alongside your personal current account? If so, having a savings account as well as a current account for your small business might seem logical. But with savings rates at the time of writing so low, moving your spare cash to a savings account might not be the best option for many businesses.
In this article, we look at UK savings accounts for small businesses, and other ways to make the most of your money.
Savings accounts for small businesses
A business savings account is a type of account that pays interest on the money you pay in. Both sole traders and limited companies can open a business savings account.
If you’re a sole trader, any savings you build up from your work income are legally yours so you can use a personal savings account for your spare cash.
If you’re operating as a limited company, a savings account for your business should be a ‘business savings account’. This is because the money belongs to your company which is legally separate from you, and is taxed differently from your personal income.
Low interest rates are bad news for savers
At the moment, UK interest rates are the lowest they’ve ever been. Which could be great if you’re paying a mortgage but it’s bad news for savers. This is a part of the Government’s strategy to stimulate the economy - with lower rates, we’re more likely to spend: it's cheaper for us to borrow more and it's less rewarding to save.
Even so, there are business savings accounts available which pay interest. The challenge is to find an account where the interest is enough for your money to keep its value over time.
Tempted to leave your business’s spare cash sitting in your current account? Here’s something to consider: doing nothing with your excess cash means the money will end up being worth less. When you factor in inflation, if you leave money in an account where it earns zero interest, over time its value will reduce in terms of what you can buy with it.
Earn more interest by locking away your money
You can get a higher interest rate on your business savings if you agree to give a set number of days notice to withdraw, or you agree not to withdraw your money for a set time.
Savings accounts where you have to let the bank know in advance that you want to withdraw your money are called 'notice’ accounts. Usually the more days notice you have to give, the higher rate of interest you’ll earn.
Savings accounts where you lock away your money for a set time (the ‘term’) are often called ‘bonds’. Usually, the longer the term, the more interest you’ll earn. Account T&Cs spell out what happens if you need to withdraw the money before the end of the term. For some accounts, it isn’t possible at all, for others there’s a penalty fee or you forfeit some or all of the interest.
Be careful if you spot accounts with surprisingly high interest rates labelled as ‘bonds’ - some bonds are investment products where the money you put in is at risk. If you’re after a business savings account - where your money isn’t put at risk - make sure the ‘bond’ you’re interested in is a cash account and not an investment account.
Savings interest is taxed as income
All interest on savings is now paid gross (without tax taken off) so you’ll need to declare the interest you earn as ‘income’ on your tax return.
If you’re a sole trader, there’s a place to declare savings interest on the self-assessment tax return.
If you’re a limited company, you’ll need to log the savings interest in your accounts and it counts towards the income on which you’ll be charged corporation tax.
The thing is, interest rates are so low at the moment that for most small businesses, the amount of interest you earn is likely to be minimal. For example, if you had £10,000 saved for a year in an account that paid 0.5% APR, you’d earn just £50 interest - less than £1 a week - so it’s unlikely to cause you a tax headache.
Build up a buffer for emergencies
With both your personal and business finances, it’s smart to build up a store of savings for emergencies or unexpected events like repairing or replacing things that break, or losing your income for a while.
How much your small business should keep in savings depends on your situation. You’ll often hear advice that you should have enough savings set aside to cover your outgoings for a minimum of three months with no income. While this is sensible for many people, if you have expensive debts it can make more sense to pay these off first.
If you prefer to keep a buffer of cash for emergencies in a savings account, make sure the account offers ‘easy’ or ‘instant’ access so you can withdraw anytime.
How to choose the best business savings account
The best business savings account for you will depend on how much access you need to your money, how much interest you want to earn, and how you feel about the different providers. Here are some questions to consider:
- When will you need access to your money?
If you want to be able to withdraw your money anytime, look for accounts labelled ‘easy access’ or ‘instant access’. If you can leave your savings untouched for a while, you can get a higher rate of interest with a ‘notice’ account where you have to tell the bank in advance that you want to withdraw, or a ‘fixed term’ account or ‘bond’ where you can’t withdraw for the entire term, which could be up to several years.
- What is the AER?
Savings providers will state the AER - annual equivalent rate - of their accounts to allow you to compare between accounts and providers. The higher the interest rate, the more the provider will offer you to keep your savings with them.
- How much can you pay in?
Check if the accounts you’re interested in have a minimum deposit. If you’ve only got £1,000 to save, then an account with a minimum deposit of £10,000 won’t be an option.
- How reliable is the provider?
Visit independent review websites to read what existing customers say about savings account providers - and see how the providers respond to messages on review sites and their social media.
- How important is the provider’s investment policy?
Providers use the money that savers pay in to lend to other customers or make investments. With a business savings account, your cash isn’t at risk and it’s covered by the Financial Services Compensation Scheme (FSCS) guarantee - but it might be important to you that the provider invests safely and ethically. To find out how a provider invests the money from savers’ accounts, you could read the ‘About us’ section of their website, do a web search for the company name and ‘ethics’ or ‘values’, or ask the provider directly.
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How to apply for a business savings account
Opening a business savings account can be easier than opening a current account. You’ll need to give details about yourself and your business, and the provider will need to verify your identity. But because savings accounts don’t come with an overdraft or credit card, banks don’t need to do a credit check and your new savings account could be open in minutes.
When you have the account number and sort code, you can start to pay in. If you have a predictable business income, you could set up regular payments to save a set amount each month.
Check your money is covered by the FSCS
The Financial Services Compensation Scheme protects up to £85,000 of the eligible money you hold with a financial institution. If you’ve racked up more than that in savings, it could be sensible to move the excess to a separate bank to make sure your money stays protected.
The £85,000 FSCS limit applies per person (or per business) and per bank or building society rather than per account, so if you open a business savings account with the same bank where you have your business current account, make sure you keep an eye on how much you hold in total with that bank.
Other ways to make your spare money work harder
Putting spare money into a savings account isn’t always the best option. If you’re wondering what to do with your business’s spare cash, here are some ideas:
- Pay off debts
How much interest are you paying on business debts such as an overdraft, loan or credit card? If you’re paying more in interest on the debt than you’d earn in interest on your savings, it’s worth considering paying off the debt. You can stay prepared for an emergency by keeping open a line of credit such as your overdraft facility or credit card. If you’re worried about owing someone money, even if there’s no interest to pay, you might want to pay off that debt as well for peace of mind - for example, if a friend put money into your business and you want to pay them back.
- Set up sub-accounts
Many providers allow you to create sub-accounts for your business current account. You could use sub-accounts to store money to pay your tax bill, to pay staff wages, for unexpected purchases and more.
- Repair or replace equipment
If you’re working with outdated tech equipment or tools, you could save time and money in the long run by updating your kit.
- Invest in training
You could use your spare cash to invest in yourself. Sign up for courses to count towards your continued professional development or retrain to add to your skillset.
If you’re not sure what purchases you can claim as expenses, check the list at gov.uk or ask your accountant.
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Sooze is a specialist financial services writer, working ‘on the inside’ to help businesses communicate clearly for over 10 years. Her work has been awarded Fairer Finance’s Clear & Simple Mark. Read more