You could be earning interest on your business's spare cash by moving it into a business savings account. Here’s how these accounts work and the options to choose from.
When you run your own business, you want your money to work as hard as possible for you. Putting your spare cash into a high-paying business savings account rather than having it languishing at 0% in your current account will help you make the most of your money and boost your income.
We look at exactly how business savings accounts work and the different types available.
Make the most of your spare cash.
A business savings account is an account available to businesses that pays you interest on your savings. It’s not for day-to-day transactions, which you would use your business current account for, but for saving money longer term.
Most business current accounts pay no interest on credit balances, so if you have cash in your account that you don’t need for making immediate payments it makes sense to move it into an account that pays you interest.
There are similar types of account available as for personal savings but the money you earn is used by your business rather than you as an individual. The type that’s best for you will depend on how often and how quickly you need access to your money.
A business savings account works in a similar way to a personal savings account, except you use it for business purposes. You deposit money into the account and then earn interest on those funds.
Like personal savings accounts, there are many types of business savings accounts, and they come with different levels of access. And you can open as many business savings accounts as you like to meet your different savings goals and priorities.
The most common types of account are:
You can withdraw your money at any time with an easy-access account, but you get a lower interest rate than with other types of account. The interest rate is variable so can change at any time. This would be the best type of account for you if you might need to access your money quickly to pay for urgent expenses.
You can withdraw your money after waiting for a set period, such as 90 days, 120 days or even longer. You can’t get instant access to your money but you can get a higher rate of interest, which is variable, than with an easy-access account. These are a good option if you want to be able to access your money but won’t need it urgently.
You get a set rate for an agreed period, which could be between one and five years, but you can’t withdraw your money during the fixed term without paying a penalty. You usually get the highest interest rate with this type of account. If you have a sum of money you won’t need access to for one or more years, this type of account is likely to be the best option.
Each account will have its own opening criteria – for example, there might be a minimum deposit to open the account, such as £5,000.
The best business savings account for you depends on your savings goals and needs.
When you’re looking for a business savings account, ask yourself the following questions to help you find the right account for your circumstances:
Do you need to access your savings regularly? Or could you afford to lock a sum of money away for a set time?
What’s the interest rate? Is it fixed or variable? Is it competitive?
How much do you need to open the account? Can you meet this requirement, and do you need to maintain a minimum balance to keep the account open?
How is the account managed? Can you manage it online or via an app, or would you prefer to have branch access?
Do you meet the eligibility criteria? Some providers may require your business to be a specific size or have a minimum annual turnover.
This depends on the type of business you run. If you’re a limited company, you must keep your personal and business finances separate. This means you can’t use a personal savings account for your business expenses and must open a business savings account instead.
If you’re a sole trader, on the other hand, you might not see the need to open a separate business savings account and might be happy sticking with your personal account.
However, if it becomes difficult to distinguish between your business and personal savings, it could be time to think about opening a business savings account. This can help with tax reporting.
One of the key benefits of a business savings account is that it pays interest (unlike most business bank accounts). If you have cash in a business bank account that you don’t need for making immediate payments, it makes sense to move it into a savings account and watch your savings grow.
Building up a sizeable savings pot for your business means you have something to fall back on for unexpected bills, to ease cash flow during seasonal lulls in business activity, or to invest in new equipment or personnel. It can also prevent you from turning to loans or other sources of funding that can result in high levels of debt.
You shouldn’t use a business savings account for everyday banking transactions – that’s what a business bank account is for. But you can use a business savings account to set aside money for emergencies or future growth.
Although there are many benefits, business savings accounts have a number of limitations, too.
For example, if you’re opening a fixed-term savings account, you can’t typically access your money for the term of the account without paying a penalty. To avoid getting caught out, you need to be sure you can leave your funds untouched for the required time.
The same applies to notice accounts – you must provide the correct notice before making a withdrawal.
You should also watch out for:
Variable interest rates: Some accounts pay rates that can go up or down at any time. This can impact your overall earnings.
Minimum balance requirements: Check whether you need to always keep a set amount in the account. If you don’t meet this requirement, your provider could cut the interest rate or close your account.
Bonus rates: Some easy-access accounts pay a bonus rate that temporarily boosts the overall interest rate. This often lasts 12 months and then rate then drops. You may need to move your money to a more competitive account after this time.
Read more: Pros and cons of a business savings account
Business savings accounts pay interest gross - without tax deducted - so you must declare any interest you earn as part of your annual tax return and pay any tax you owe on it.
You will only be liable to pay tax on any money you make above the standard tax-free personal allowance, which is £12,570. This means you can earn up to £12,570 (including any interest made on your savings) before you have to pay any tax.
If your income (excluding savings interest) is less than £17,570 you can earn up to £5,000 in interest without paying tax on it. This is called the starting rate for savings.
Otherwise, you get a personal savings allowance of £1,000 if you’re a basic-rate tax payer and £500 if you pay the higher rate. Additional-rate tax payers get no savings allowance.
You can work out how much tax to pay as part of your annual self-assessment tax return. Any tax you owe will be due to HMRC by 31 January following the end of the tax year.
The deadline for completing your tax return is 31 October after the tax year ends if you’re filing a paper return and 31 January if you’re doing it online.
You will pay corporation tax on any profits you make as part of your business. This includes any interest made on business savings. The amount you need to pay will be calculated when you prepare your company tax return.
You usually have to pay your tax bill to HMRC within nine months of the end of your accounting period.
Business deposits in savings accounts by small businesses and limited companies are generally protected under the Financial Services Compensation Scheme (FSCS) up to £85,000 per financial institution, regardless of the size of your business. This means your money is protected if your provider goes bust.
Find out more about how the FSCS protects business bank accounts or visit the FSCS website for more information.
As you probably won’t be getting any interest on the money in your business current account, it’s well worth paying any spare cash into a business savings account to make the most of your money by earning interest on it.
You should have a cash reserve to keep you going for at least three months in case your income drops – a savings account will help you do this. Keeping money in a savings account will also help you make sure you have enough money for the following:
Paying tax when it’s due
Paying any VAT you owe if your business is VAT registered
Paying for any unforeseen expenses
Making larger investments to develop your business
Paying off outstanding debts
No, an ISA is for personal savings only. The exception is if you are a sole trader, then you could use an ISA to save in your own name.
As many as you like. Just remember that the more accounts you have the more information you will need to give on your self-assessment form each year.
The length of time it takes to open a business savings account depends on the provider and how quickly you supply the necessary information and documents. Your account could be up and running the same day, or it could take a couple of weeks.
Make the most of your spare cash.
Rachel has spent the majority of her career writing about personal finance for leading price comparison sites and the national press, including for the Mail on Sunday, The Observer, The Spectator, the Evening Standard, Forbes UK and The Sun.