When running a business, it’s important to ensure every penny is working for you. Instead of leaving your funds idle in a current account, investing in a high-interest business savings account can significantly boost your income.
This guide will explain how these accounts work and explore the different types available, helping you to make the most of your money and enhance your business’s financial strength.
>>Read our full article on What are the Best Business Savings Accounts in the UK?
Are Business Savings Accounts Worth It?
Business savings accounts can be worth it for a number of reasons. Here are some of the benefits of having a business savings account:
- Earn interest on your surplus funds. Most business savings accounts offer far higher interest rates than business current accounts. Earning the best interest possible on surplus cash is a sound business decision.
- Build an emergency fund. A business savings account can be a great way to build an emergency fund, which can help you to cover unexpected expenses, such as equipment or a sudden drop in sales.
- Save for short-term goals. You can also use a business savings account to save for short-term goals, such as a new marketing campaign or a trade show.
- Protect your savings. Business savings accounts are protected by the Financial Services Compensation Scheme (FSCS), which means that your savings are safe up to £85,000 in the unlikely event that your bank goes bust.
Disadvantages of Business Savings Accounts
While business savings accounts have benefits, there are some downsides to consider:
- Slow Earnings Growth: Interest rates are usually low, so your money grows slowly. There might be faster ways to increase your funds.
- Minimum Balance Requirements: Some accounts need a certain balance, which can be challenging if your income varies. This range can be from £1 to over £25,000.
- Fees and Penalties: You might face fees for transactions or penalties for early withdrawals, which can eat into your savings.
- Withdrawal Restrictions: Some accounts limit how often and how much you can withdraw. Early withdrawal from a fixed-term account could lead to extra fees.
- Tax on Interest: The interest you earn is subject to tax, which can reduce the overall amount you gain, especially depending on your business structure.
Eligibility for Business Savings Accounts
To open a business savings account, the criteria generally include:
- Your business should be based in the UK and registered with Companies House.
- Eligibility extends to a range of business structures, such as limited companies, partnerships, and sole traders.
- An opening deposit is often needed, usually not exceeding £25,000.
- There’s typically a requirement to maintain a balance, which can range from as low as £1 to more than £25,000.
- It’s important to note that some businesses may be excluded from opening savings accounts based on their specific type.
What Types of Savings Accounts Can Businesses Get?
Businesses have access to a variety of savings accounts to suit their specific needs. These accounts can be categorized into three main types:
Easy Access Savings Accounts
Easy access accounts are all about flexibility. They let you deposit or withdraw money whenever you need to. This convenience makes them a popular choice for businesses that require regular access to their funds. However, this flexibility often comes with a trade-off in the form of lower interest rates, usually up to 3.65% AER. They are ideal for businesses that prioritize immediate access to funds over higher interest earnings.
Notice Savings Accounts
Notice savings accounts offer a middle ground between accessibility and higher interest rates. To withdraw funds, you need to give prior notice – typically 30, 60, or 90 days. This advance notice requirement allows banks to offer slightly higher interest rates, sometimes reaching up to 4.40% AER. These accounts suit businesses that can plan their cash requirements in advance and are willing to trade immediate access for better interest rates.
Fixed-Rate Savings Accounts
Fixed-rate accounts offer the highest interest rates, often up to 5.25% AER, in exchange for locking in your money for a set period, like 6, 12, or 24 months. This means you won’t be able to access your funds during this period without facing a penalty. They are an excellent choice for businesses with surplus cash that won’t be needed in the short term and are seeking the best possible return on their savings. These accounts are ideal for long-term financial planning where the business can afford to set aside funds for an extended period.
Interest Rates in Business Savings Accounts
When you’re looking into business savings accounts, the interest rate is a key element to consider. There are generally two types of rates: fixed and variable. Fixed rates remain constant over a set period, offering predictability in the interest you’ll earn. On the other hand, variable rates change with market and economic conditions, which means they can go up or down and offer a chance for potentially higher returns, albeit with less certainty.
Some accounts have tiered interest rates, where the rate increases as your account balance grows. This can be particularly beneficial if you’re able to maintain a higher balance. Additionally, the frequency of interest payments – whether monthly, quarterly, or annually – can impact your cash flow and the compound interest you accumulate. Regular interest payments can contribute to faster growth of your savings.
Are There Fees Associated With Business Savings Accounts?
While many business savings accounts come without fees, some do have specific charges. Here are the common types:
- Transaction Fees: You might be charged for moving, transferring, or withdrawing money. These fees usually range from £0.25 to £15 per transaction.
- Minimum Balance Fees: If your account falls below a required minimum balance, you could face monthly or annual fees.
- Early Withdrawal Penalties: Withdrawing funds before the end of a term, especially in fixed-rate accounts, can lead to charges. These are often based on the interest you would have earned if the money had stayed in the account for the full term.
Always read the terms of your account to understand these fees and how they might affect your business’s finances.
Are Business Savings Accounts Covered Under the FSCS?
Business savings accounts in the UK are usually covered by the Financial Services Compensation Scheme (FSCS). This scheme, backed by the government, offers protection for your deposits up to £85,000. Here’s what you need to know:
- £85,000 Coverage: If you have a business savings account with a bank, building society, or credit union that’s part of the FSCS, your deposits are protected up to £85,000. This is particularly reassuring in the rare event that the financial institution faces difficulties.
- Coverage Per Depositor, Not Per Account: It’s important to remember that the £85,000 protection is for each depositor, not each account. So, if you hold multiple accounts with the same institution, the total protection for all your deposits combined is still £85,000.
This means when you’re choosing where to keep your business savings, consider how the FSCS protection applies, especially if your total savings exceed £85,000.
Do you Pay Tax on a Business Savings Account?
All interest earned on business savings accounts is paid gross, meaning it’s not taxed at source. You’re responsible for declaring this interest and paying the appropriate tax, depending on your business type and the amount of interest earned. Here’s what you need to know:
For Sole Traders:
- Personal Allowance: If your total income, including interest, is below the Personal Allowance (£12,570 for 2023/24), you won’t pay Income Tax on it. Income above this limit is subject to tax.
- Starting Rate for Savings: If your income from other sources is under £17,570, you may get up to £5,000 of tax-free interest. This allowance reduces by £1 for every £1 of income above the Personal Allowance.
For Limited Companies:
- Corporation Tax: Interest earned is taxable under Corporation Tax. For 2023/24, the small profits rate of 19% applies if total profits, including interest, are £50,000 or less. Profits above £250,000 attract the main rate of 25%.
Our Tips for Maximizing Business Savings Account Benefits
Here are straightforward strategies to get more out of your account:
- Keep Track of Interest Rates: Regularly check interest rates and move your money if you find better rates elsewhere. This can increase your earnings over time.
- Adjust Your Savings Often: Don’t just set and forget your savings. Change how much you save based on your business’s cash flow and any changes in interest rates.
- Balance Easy Access with High Returns: It’s important to have some savings you can quickly access while also having some in accounts that earn more interest but might be harder to access.
- Plan for Taxes: Work with a financial advisor to make sure you’re saving in a tax-smart way. This includes understanding how tax affects the interest you earn.
- Use Automated Systems: Set up systems that automatically move extra cash into your savings. This ensures your money is always earning interest.
- Spread Your Savings: Put your savings in different banks to reduce risk and take advantage of different rates. Make sure you stay within safe limits for insurance on your deposits.
- Stay Up-to-Date on Rules: Keep an eye on any changes in the laws or regulations that could affect your savings or taxes.
Can you have an ISA for business savings?
ISAs (Individual Savings Accounts) are designed for individual consumers and not for business purposes.
Limited companies must use a separate business savings account for their business savings.
However, if you are a sole trader, you may be able to use a business savings account or an ISA if you are saving in your name as your business and personal savings are considered the same.
Can I access money in my business savings account at any time?
It depends on the type of business savings account you hold.
Each type of savings account offers different levels of flexibility.
You can access your savings in an Easy-access account anytime, but if you have a Notice or Fixed-Rate account, you may be charged an Early Withdrawal Penalty if you want to withdraw funds before the specified date.
You should consider how often you need to access your savings when opening your account.