Business savings accounts explained

Running a business means keeping a close eye on your finances, and that includes making the most of any spare cash. Whether you’re building a buffer for quieter months, saving for future investment or just want to earn some interest on surplus funds, a business savings account can help your money work harder.

This guide explains how business savings accounts work, what to look for when comparing options, and how to choose the best account for your company.

At a glance

• Opening a business savings account enables your company to earn interest on its surplus cash

• You can use a business savings account to set aside money for tax bills, investment opportunities or unexpected expenses

• Business savings options include easy-access, fixed-rate and notice accounts

• When choosing a business savings account, consider how frequently you might need to access your money and how much you can afford to set aside

• You usually need to pay tax on the interest you earn with a business savings account

What is a business savings account? 

A business savings account is a type of bank account that enables you to earn interest on your spare cash. Unlike a business current account that’s used for everyday transactions, you use a business savings account to store any money not required for immediate use. 

The main purpose of a business savings account is to help companies grow their cash reserves while earning a return, rather than allowing surplus funds to sit idle in a current account. You can use a business savings account to help build an emergency buffer, save for tax bills or plan for future investment. 

What types of business savings accounts can you apply for?

As with personal savings accounts, there are several types of business savings accounts to choose from, depending on whether you want instant access to your money or are happy to lock a lump sum away for a set term. These include:

• Easy-access savings accounts

• Notice savings accounts

• Fixed-rate savings accounts

We’ve outlined the key features of each of these in the table below:

Difference between personal and business savings accounts 

Personal and business savings accounts work in broadly the same way (you deposit money and earn interest), but they serve different purposes. You use a personal savings account to manage your own money, and a business savings account to hold company funds.

You can usually earn a higher interest rate on personal accounts, but that doesn’t mean they’re suitable for business use.

If you’re a sole trader or freelancer, there’s no legal requirement to separate your personal and business finances. However, opening a business savings account can help you stay organised and set aside money for tax bills or large business costs.

If you run a limited company or limited liability partnership, the rules are different. Your business is a separate legal entity, so you must keep its finances distinct from your own. That means using a dedicated business savings account for any company funds.

What are the advantages of business savings accounts?

There are several benefits to opening a business savings account:

• Interest is paid on surplus cash: You earn interest on any money you don’t need day to day, rather than letting it sit idle in your current account. This helps your cash reserves grow over time

• Building a financial buffer: Stashing away spare cash gives you a safety net for unexpected costs or quiet trading periods

• Keeping tax money ring-fenced: A business savings account enables you to set aside money for tax bills, such as VAT and corporation tax, so you’re not left short when payment deadlines arrive

• Meeting business goals: You have a pot of money to use for investment opportunities, such as new equipment or expansion, so you don’t need to rely so heavily on credit or external funding

• Financial protection: If your business savings account is held with a UK-regulated bank, the Financial Services Compensation Scheme (FSCS) protects your funds up to £85,000 per financial institution. This means you should get your money back if your bank ceases trading

• Reduces the temptation to spend: Transferring funds out of your business bank account and into a savings account can help you stay disciplined with your finances

What are the disadvantages of business savings accounts? 

There are also several limitations you should be aware of before opening a business savings account:

• Withdrawal restrictions: If you choose a notice or fixed-term savings account, you may have to wait days, months or years before you can access your money penalty-free

• Minimum deposit requirements: Some business savings accounts have minimum opening balances that may be too high for smaller businesses or sole traders that are just starting out. You should also check whether you need to maintain a set balance to prevent the account from closing

• Tax on interest: Business income includes the interest earned from savings, which means it’s subject to either income tax (for sole traders) or corporation tax (for limited companies)

• Variable interest rates: Some business savings accounts pay a variable rate of interest, which means it can change at any point and impact your overall earnings

How to choose the best savings account for your business 

When comparing business savings accounts, you should consider the following:

• Eligibility criteria: You can usually open a business savings account whether you’re a partnership, limited company, sole trader or charity. However, be sure to check whether there are any annual turnover requirements or additional criteria, such as having a UK-based business address

• Withdrawal options: Think about whether you want to be able to access your savings quickly in the event of an emergency, or whether you’re happy to stash away some cash for the long term

• Minimum and maximum balance requirements: Check whether you need to pay in a minimum deposit when opening the account. Also, check the minimum and maximum balance requirements

• Additional deposits: Many fixed-rate savings accounts only allow you to make one deposit when you first open the account, so be sure to check the small print of your account before making your decision

• Interest rate: Once you know what type of business savings account you want, look for the one that pays the highest rate of interest

• Account management: Are you happy banking solely online, or would you like to be able to pop into your local bank branch to withdraw your business savings? 

• Linked business current account: Some business savings accounts ask that you hold a business current account with the same provider, so check first

How do you open a business savings account? 

Once you’ve chosen a business savings account, you can usually open it online, in branch or over the phone, depending on the provider. The easiest option is usually to open your account online, as it typically takes only around 10 to 20 minutes to complete the application.

The application form usually asks you to provide details such as:

• The names, dates of birth and addresses of all business owners and directors

• Proof of identity and address for all account holders

• The name of your business

• The business address

• Company registration number if you’re a limited company

• Business bank account details

• Your business turnover

Depending on the bank and how quickly you provide the necessary information, your account could be up and running the same day. However, in some cases, it might take a few days to a couple of weeks. Once you’ve opened your account, you can transfer money from your business current account and start saving.

Are business savings accounts taxed?

Business savings accounts pay interest gross, without tax deducted. This means it’s your responsibility to declare any interest you’ve earned when you complete your tax return and pay the amount of tax due.

Tax rules for sole traders

If you’re a sole trader, you only pay tax on income above your personal allowance of £12,570. This covers all income, including interest earned on savings. 

If your total income is less than £17,570, you can earn up to £5,000 in interest from savings tax-free (known as the starting rate for savings). If it’s more than this, you have a personal savings allowance. This is £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. Additional rate taxpayers have no personal savings allowance. 

You must declare any interest earned and calculate the tax due when completing your self-assessment tax return. The deadline is 31 October for paper returns, or 31 January if you’re filing online. You must pay any tax owed to HMRC by 31 January following the end of the tax year.

Tax rules for limited companies

Things work differently for limited companies because they must pay corporation tax on all profits, including interest earned from business savings. You declare this as part of your company tax return.

You usually need to:

• File your company tax return with HMRC once you’ve finalised your accounts 

• Pay any corporation tax due within nine months of the end of your company’s accounting period

Read more …

• Compare business savings accounts

• How to managa cash flow