Table of Contents
Business savings accounts can be a fantastic way to save for the future, put funds aside for a big purchase or just put your business’s money to work earning interest. But how do they work and what different types of accounts are available? Read on to find out more.
What is a business savings account?
You can open a business savings account online or in a bank branch just as an individual can. A business savings account is a place for businesses to put excess cash on which they wish to earn interest. It is different from a business bank account, which is for day-to-day transactions, such as receiving sales proceeds, paying invoices and paying bills.
Business savings accounts are for limited companies, partnerships, sole traders and charities. However, each account will come with its own set of eligibility criteria and requirements, such as minimum deposits, which your business will need to adhere to in order to open and manage an account.
Businesses can also choose to invest excess cash, but using a savings account is generally a simpler and less risky solution.
» MORE: Can businesses invest?
Types of business savings accounts
Instant and easy access business savings account
Instant and easy access savings accounts allow businesses to earn interest while keeping savings within arm’s reach.
On the downside, these products generally offer the lowest interest rates on the market as this is the price you pay for flexibility. In addition, the accounts tend to be variable rate accounts, which means the provider can change the interest rate.
These factors combined mean your savings growth can be unpredictable and you could make more money by locking savings away in fixed-term accounts.
An instant or easy access business savings account could be the right type of account for your business if:
- You know your business will need access to the money soon for an expansion, bill payment or other significant expense.
- Your business often faces unpredictable periods where income is relatively low or expenses are particularly high.
- You want the security of having a pool of cash you can quickly draw from in case of emergencies.
Fixed-term business savings account
Fixed-term business savings accounts allow businesses to squirrel away money and earn interest for a specific period of time.
At the end of this term, normally between one and five years, you may be able to:
- Opt for the money to be reinvested in another fixed-term savings account.
- Have the funds returned to your nominated bank account.
- Allow your fixed-term savings account to become an instant-access savings account.
While fixed-term accounts mean your business’s money isn’t accessible for a period of time, they do tend to offer higher interest rates than their more flexible alternatives. In addition, these interest rates are generally fixed. This means businesses can take advantage of high rates for an extended period and be certain about how much interest they will earn.
A fixed-term business savings account could work for your business in the following examples:
- You are confident the business will not need access to savings for at least one year.
- You want to earn the highest possible interest on any savings.
- You need a way to keep savings locked away, helping you to avoid impulsive withdrawals.
- You can comfortably adhere to account requirements such as minimum deposit levels, which may be stricter than alternatives.
» MORE: What are interest rates and what do they mean?
Notice business savings account
A notice business savings account is like a halfway house between easy access and fixed-term varieties. While there is no fixed term to deal with, businesses need to apply in advance to withdraw money.
These notice periods for a withdrawal can range from 31 to 180 days. This offers some flexibility to choose a time frame that suits you, without necessarily leaving your business’s savings completely inaccessible for an extended period.
In addition, notice business savings accounts normally offer variable interest rates. Interest rates offered by these accounts are usually higher than easy access accounts.
A notice business savings account might be the right solution for your business if the following applies:
- You are worried about impulsively dipping into your business savings.
- Your business may need access to additional funds, but you are confident any expenses that arise will not be urgent.
- You have significant visibility on future business expenses.
Pros and cons of business savings accounts
Pros
- Earn more interest: In most cases, a business savings account will ensure your money is earning more interest than it would sitting in a current account.
- Low risk: Compared to options such as investing, business savings accounts are low risk.
- Discourages frivolity: For impulsive spenders, locking money away can remove temptation and may prevent business purchases that you may regret.
- Create boundaries: If your business is saving money for a particular purpose, separating the relevant funds from your main business current account will establish a clear barrier between money for everyday operations and funds for future ambitions.
Cons
- Accessing money: With some business savings accounts, it can take time to withdraw funds.
- Potential returns: Although a simpler and lower-risk option than investing, business savings accounts offer lower maximum potential returns.
- Interest rates: Variable interest rates can fall over time, reducing the interest earned. In addition, getting a fixed-rate account at the wrong time can leave you with a bad deal.
Do businesses pay tax on interest?
Businesses do need to pay tax on all interest earned through business savings accounts and must declare it on annual company or self-assessment tax returns. For limited companies, corporation tax applies to profits made from trading, investing or selling assets.
For sole traders, the situation is more complicated. First, the personal allowance of £12,570 means any income earned below this benchmark is not taxed.
If your sole trader income is more than £12,570 but below £17,570, you can also take advantage of the starting rate for savings. At its highest, this amounts to £5,000 you can earn tax free. However, the amount of interest you can earn tax free is reduced by £1 for every £1 you earn above £12,570 This means a sole trader who earned £13,570 would be able to earn £4,000 in savings interest tax-free.
Finally, the personal savings allowance allows those paying the basic rate of income tax to earn £1,000 in savings interest tax-free, whiler those on the higher rate of tax can earn £500 in interest tax-free. There is no tax-free savings allowance for those on additional-rate tax.
It is worth noting that sole traders could consider opening a personal savings account for their business savings, allowing them to shop around more for the best interest rates.
» MORE: Business tax in the UK
What is a high-interest business savings account?
You will not find accounts called a high-interest business savings account. If you are looking for a business savings account which offers the highest interest rates, fixed-term options tend to offer the highest yields. More details about these accounts can be found in the relevant section above.
Are business savings accounts protected by the FSCS?
The Financial Services Compensations Scheme (FSCS) provides protection for up to £85,000 of a business’s funds if your account provider goes bust.
Limited companies and partnerships receive protection up to £85,000 per provider in addition to the £85,000 protection offered for personal accounts. For sole traders, as there is no legal distinction between the individuals and business, the FSCS will protect £85,000 in total across all personal and business accounts held with each bank.
When applying for an account, you should make sure your provider is covered by the FSCS. You can do this by checking the FCA register.
Can I get a business ISA?
Individual savings accounts, or ISAs, allow individuals to save money in a tax-efficient manner. However, they are not available for businesses and there is no comparable product for businesses to use.
The one exception is for sole traders. For a sole trader, there is no legal distinction between themselves and their business. As such, and provided they pay income tax correctly, sole traders can deposit their business’s proceeds into an ISA.
» MORE: Best sole trader bank accounts
WARNING: This page does not constitute advice as we cannot tell you if any form of investing is right for you.Your capital can be at risk and you may get back less than you originally paid in.
Image source: Getty Images
About the Author
Dive even deeper
Public Liability Insurance: What is it and What Does it Cover?
Small Business Grants and Start Up Business Grants in England – Apply now for 2025
by George Harrison