What are business savings accounts?

If you run your own business, you’ll know the importance of working hard.

But is your money working as hard for you?

When interest rates are high, businesses might consider making use of savings accounts.

Saving isn't just for families and individuals; businesses can also benefit greatly from having a savings account. 

A business savings account can help your company set aside money for emergencies, future growth, or simply as a financial cushion. 

Although it can be challenging to prioritise saving over other business needs, even a small amount of savings can provide significant financial security.

In this article, we’ll examine what a savings account for a business is, what the different types of business savings account are, and what the benefits and drawbacks to your business of having one are.

When considering any type of finance, it’s important to first seek independent specialist advice to help you determine if the finance type on offer is right for you and your business.

What is a business savings account?

A business savings account is specifically designed for businesses to earn interest on their savings. 

Unlike a business current account, which is intended for daily transactions, a business savings account is meant for longer-term savings.

Typically, business current accounts do not offer interest on credit balances. 

Therefore, transferring excess funds that are not required for immediate expenses into a business savings account can be financially beneficial as it allows you to earn interest on your idle cash.

Similar to personal savings accounts, business savings accounts come in various forms. 

However, the key difference is that the interest earned is utilised by the business rather than an individual. 

The best type of business savings account for your needs will depend on how frequently and quickly you need to access your funds.

Businesses can have as many savings accounts as they like.

What is the difference between a personal and a business savings account?

The primary distinction between personal and business savings accounts lies in their intended use: personal savings accounts are for individual finances, while business savings accounts are for business-related funds.

For example, you might use a personal savings account to save for a holiday or home renovations, whereas a business savings account is used to manage customer payments and business expenses.

If you're a freelancer or sole trader, you might not see the necessity for a separate business savings account and could find that a single personal savings account suffices for managing income from a side hustle. 

However, there are situations where opening a business savings account is advisable:

Operating as a limited company: If your business is registered as a Limited Company through Companies House, your personal and business finances must be kept separate.

High business turnover: When your business turnover is substantial, it can become challenging to manage professional and personal transactions within a single account.

Tax clarity: Having separate accounts helps clearly separate out your income and expenses, simplifying tax reporting and compliance.

What are the different types of business savings account?

Business savings accounts primarily differ based how long you need to store your money in the account and the interest rates offered.

The period of savings typically influences the amount of interest you earn, as well as the type of interest rate, be it fixed or variable.

Fixed interest rate: This rate remains constant over time, providing predictable returns.

Variable interest rate: This rate can fluctuate, meaning it may rise above or drop below fixed rates. Businesses should be aware of these potential changes when opting for a variable rate.

Understanding these differences can help you choose the most suitable account for your business needs.

There are three main types of savings account available to UK businesses:

Easy access savings account

This type of account is ideal for businesses that aim to earn interest on their savings while retaining the flexibility to access funds in the short term. 

Although each bank may offer slightly different instant or easy access accounts, they generally share these common features:

• greater flexibility to deposit or withdraw funds
• variable interest rates
• typically, lower interest rates compared to other business savings accounts.

As with all savings accounts, there is typically a trade off between the amount of interest you can earn and how frequently you can withdraw funds from the account.

An easy access account could be a good choice if you plan to use the money (when its not in the savings account) for unexpected expenses.

Fixed-term savings account

Fixed-term business savings accounts are tailored for businesses that can commit to leaving their money untouched for a specified period, in exchange for higher interest rates. 

The agreed period could typically be from one year to five years.

Each account is likely to have specific opening criteria, such as a minimum amount of money you need to deposit to open the account.

Key features of these accounts include:

Ideal for long-term savings: Suitable for businesses that do not need to access funds for a set period.

Higher interest rates: These accounts typically offer higher interest rates compared to more flexible savings accounts.

Fixed interest rates: Accounts like this often come with fixed interest rates, providing greater financial predictability and peace of mind.

No early withdrawals: Funds are generally locked away until the end of the term, with no early access permitted. In some circumstances you may be able to withdraw funds if you pay a pre-determined penalty.

Notice savings account

A notice savings account serves as a hybrid option, blending some interest benefits of a fixed-term account with the withdrawal flexibility of an instant or easy access account. 

Key features and reasons for choosing a notice savings account include:

Hybrid benefits: These accounts offer better interest rates than instant access accounts, while providing more flexibility compared to fixed-term accounts.

Withdrawal flexibility: Allowing business savers to withdraw funds after giving notice, unlike fixed-term accounts where funds are locked in.

Notice period requirement: Funds are released only after the specified notice period has expired, unlike instant accounts where withdrawals can be immediate.

Penalty-free withdrawals: After completing the notice period, funds can typically be withdrawn without incurring penalties.

Variable notice periods: Notice periods generally range from 30 to 180 days, depending on the account terms.

These types of accounts could be helpful to a business that will be seeking to use the money for a regularly scheduled expense, such as paying VAT.

What are the advantages of using a business savings account?

As with all financial products, there are a number of benefits for businesses in opening savings accounts:

Growing your cash reserve

As business current accounts don’t typically pay any interest, businesses that keep their working capital in a current account might be missing out on an additional stream of revenue that could help grow their cash reserves and thus help support their business.

Additional source of income

The interest generated by a business savings account can be used to ease cash flow during seasonal lulls in activity for the business or even contribute to paying some larger expenses such as an investment in new equipment, paying off outstanding debts, or paying a tax bill.

FSCS protection

Deposits made by small businesses and limited companies into savings accounts are generally protected under the Financial Services Compensation Scheme (FSCS) up to £85,000 per financial institution. 

This coverage applies regardless of the size of the business. 

The FSCS protection ensures that your money is safeguarded in the event that your financial provider becomes insolvent.

Learn more by visiting the FSCS website.

What are the disadvantages of using a business savings account?

Before you open a business savings account it’s a good idea to read up on some of the potential drawbacks of business savings accounts.

Balancing flexibility and interest rates

As the higher interest paying accounts often require you to leave funds in the account for a specific amount of time, you’ll need to be sure that you’re unlikely to need the funds you deposit in the account suddenly if you want to obtain the highest interest rate.

Minimum deposits

Although this isn’t always the case, the higher interest paying savings accounts will often require a minimum deposit when you open the account.

This can have a negative impact on the cash flow of your business.

Withdrawal penalties

With some business savings accounts, if you need to withdraw funds from the account you won’t be able to do so without paying a penalty.

This is particularly the case with fixed-term accounts but also notice accounts if you need to withdraw funds urgently.

This could create cash flow issues for your business if your expenses aren’t carefully managed and forecasted.

Account management

With each bank taking a slightly different approach to business savings accounts, offering different functionality and requirements, it’s important that you clearly understand what you’re signing your business up to and what’s expected.

What taxes will I need to pay on interest earned from a business savings account?

Interest earned on business savings accounts is paid gross, meaning no tax is deducted at the source.

Consequently, you must declare this interest as part of your annual tax return and pay any applicable tax on it.

Sole traders

As a sole trader, you are liable to pay tax only on income that exceeds the standard tax-free personal allowance of £12,570. 

This includes any interest earned from your savings. 

Therefore, you can earn up to £12,570 (including savings interest) before any tax is due.

If your non-savings income is below £17,570, you can earn up to £5,000 in savings interest without paying tax, under the starting rate for savings. 

Otherwise, you will receive a personal savings allowance that depends on your tax bracket:

• basic-rate taxpayers get an allowance of £1,000
• higher-rate taxpayers get an allowance of £500
• additional-rate taxpayers do not receive a savings allowance.

You will determine your tax liability as part of your annual self-assessment tax return. 

Any tax owed must be paid to HM Revenue and Customs (HMRC) by 31 January following the end of the tax year.

The deadlines to complete your tax return are:

• 31 October after the tax year ends for paper returns
• 31 January for online returns.

Limited Companies

If you are the owner of a limited company, you are required to pay corporation tax on any profits your business generates, including interest earned from business savings. 

The exact amount of tax due will be determined when you prepare your company tax return.

Typically, you must settle your tax bill with HM Revenue and Customs (HMRC) within nine months following the end of your accounting period.