Business savings accounts explained

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.

What is a business savings account?

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. 

Can a business have a savings account?

In the same way that a business can have a current account, a business can also have a savings account. 

If you have a limited company, you won’t be able to open a savings account designed for individuals as it’s a separate legal entity and a legal requirement to keep your business and personal finances separate. This means you’ll need to take out a dedicated business savings account and will need to move money in and out of the account via a business current account. It doesn’t have to be with the same bank as your savings account.

If you’re a sole trader you can move money between business accounts and personal accounts, as both will be in your name. This means you can apply for personal savings accounts to earn interest on your business savings.

What types of savings accounts can businesses get?

Like personal savings accounts, there are many types of business savings accounts, and they come with different levels of access.

The most common types of account are:

Easy access accounts

You can withdraw your money at any time, 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.

Notice accounts

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.

Fixed-rate accounts

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.

When you’re looking for a business savings account, ask yourself the following questions to help you find the right account for your circumstances:

• How much access to your money does it give you?

• What’s the interest rate?

• Are there penalties for withdrawing your money?

• How can you manage the account: online, in branch, by post, over the phone or using a smartphone app?

• Is there a minimum amount you need to deposit to open the account?

Are business savings accounts worth it?

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

Are business savings accounts taxed?

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.

If you are a sole trader

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.

If you have a limited company

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.

Are business savings covered under the FSCS?

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.

Visit the FSCS website for more information.