Business Savings Accounts Guide
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.
In this article, we look at the different types of business savings accounts and what they can offer your small business.
What is a business savings account?
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 after tax 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. As such, you can’t use a personal savings account for business savings.
Types of business savings accounts
Instant access accounts
Instant access accounts, also known as ‘easy access’ accounts, let you deposit and withdraw money whenever you want, though you may be subject to minimum withdrawal restrictions.
The trade-off for your money being easily accessible is the interest rate you can achieve. Generally, interest rates on instant access accounts tend to be lower than those on notice or fixed-term accounts. They are also usually subject to change during the term of the account, either in line with the Bank of England base rate or as a result of other changes which can alter what the provider can offer you.
You may be able to get a higher interest rate on your business savings if you agree to give a set number of days notice to withdraw. 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.
With notice accounts, the interest rate you are offered when you open the account can change according to your bank’s terms and conditions or the Bank of England base rate.
Fixed-term accounts or bonds
Savings accounts where you lock away your money for a set time (the ‘term’) are often called ‘fixed-rate bonds’ or fixed term accounts. Usually, the longer the term, the more interest you’ll earn. The interest rate you are offered when you open the account is also fixed and will not change.
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 may be a penalty fee or you may 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.
Interest rates vary by provider and account type, so it’s worth shopping around to find an account that suits your business needs.
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 could end up being worth less in the future, when you factor in inflation, which is a rise in the cost of goods and services over time. 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.
Do I have to pay tax on any interest I earn?
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 self-employed.
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 will count towards the income on which you’ll be charged corporation tax.
The thing is, 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% AER (see on), you’d earn just £50 interest – less than £1 a week – so it’s unlikely to cause you much of a tax headache. But watch out, as this could change.
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. Managing a savings account for emergencies may be part of your business continuity plan.
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.
If your emergency fund is in a business savings account, you may want to make sure the account offers ‘easy’ or ‘instant’ access so you can withdraw any time.
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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 – though remember that with instant access and notice accounts, this could change in the future.
- 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 up to £85,000 of savings is 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 include ‘ethics’ or ‘values’, or ask the provider directly.
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How to apply for a business savings account
To open a business savings account, you’ll need to give details about yourself and your business, and the provider will need to verify your identity. 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.
Equally, if you’re a sole trader, your personal and business deposits will count toward the same limit. On the other hand, if you run a limited company, you will get two £85,000 limits – one for your personal finances and one for your business money – as the two are legally separate.
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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
Kristina is a writer at NerdWallet. A recent graduate trading French for finance, she has experience creating content for student newspaper Cherwell and an edtech company. Read more