Everything you Need to Know About Business Savings Accounts
In partnership with Tide: A business savings account enables you to maximise your funds by earning interest. Learn everything you need to know about business savings accounts.
Maximise your funds by earning interest with a business savings account. Discover the key benefits, how they work, and everything else you might need to know to make the most of your business savings.
If your business is doing well and is starting to generate surplus cash, it makes sense to consider moving some of your spare funds into a business savings account.
This article covers everything you need to know about business savings accounts, from how they work to the benefits of having one to the types of accounts that are available.
A business savings account is a bank account that pays interest on money you deposit and holds it. It’s separate from a current account, which is typically used for your business’s day-to-day banking needs and doesn’t pay interest on your deposits.
Let’s look at why it’s worth opening a business savings account.
The main benefit of having a business savings account is that it allows you to earn income from your spare cash, instead of leaving it in your current account where it won’t earn a penny.
Moving this money into a savings account can increase its value by as much as 4%, with no effort required beyond opening the account and depositing the funds. We know every little helps when it comes to growing a business from the ground up.
Other business savings account benefits include:
- Separate your finances: If your business is a limited company, you have a legal obligation to keep your personal and business finances separate. Used alongside a dedicated business current account, a business savings account helps ensure total financial separation to keep you fully-compliant with the rules. You might deposit surplus funds, tax reserves, or emergency savings into a business savings account to earn interest while keeping these funds secure and separate from day-to-day operations.
- Compliance for grants: While not mandatory, keeping grant funds separate from regular income ensures clear tracking, compliance with grant conditions, and accurate reporting. This separation helps maintain transparency, which is crucial for adhering to regulations.
- Grow your R&D budget: Savings accounts can be highly beneficial for grant-winners, helping you improve your cash flow management when receiving large lump sum payments. Placing grant funds in a savings account allows you to earn interest over time, providing a simple way to maximise earnings. As your project progresses, the extra interest can contribute to growing your R&D budget, helping keep the project on track without additional effort. For instance, with Innovate UK’s Smart Grant, you can secure up to £1M for your R&D project and put some of this into a savings account, ready for when you need it next.
- Put money aside for taxes: If you’re a self-employed sole trader, it’s vital that you keep enough income aside to cover your annual tax and national insurance bill. Keeping this money in a business savings account makes tax planning easier, and reduces the impact of the bill thanks to the interest you’ll earn.
- Prepare for surprise expenses: Having spare funds is a great position for any business to be in. Holding them in an interest-paying savings account makes that position even stronger, boosting the value of your rainy-day fund and securing your ability to cover any unexpected costs.
- Build a healthy balance sheet: A cash reserve is one of the key indicators of a strong balance sheet, something that will be crucial if you want to apply for business credit or attract investment. This enables you to take advantage of opportunities for growth.
A business savings account works in the same way as a personal savings account. The account provider promises to pay you interest at an agreed rate and frequency based on how much you deposit and how long you keep the money in your account.
The key difference between a personal and business savings account is that deposits in a business savings account belong to the business.
If you’re a sole trader, this makes no difference in practice since you are the business and all its funds belong to you personally. But if you’re the director of your own limited company, any company funds in a business savings account belong to the company – not to you.
Let’s look at the main types of business savings accounts on the market.
As with any financial product, it’s wise to shop around if you want to get the best deal on your business savings account. Here are the key terms and account types to be aware of.
Variable Rate
With a variable rate savings account, the account provider can change the rate at which you earn interest, which is usually dependent on changes in the economy. This can boost your earnings if economic conditions improve, but it can make it difficult to predict how much you’ll earn.
Fixed Rate
A fixed rate savings account is one where the interest rate is locked for an agreed period, during which it cannot be changed by the account provider. You may receive a higher interest rate, in exchange for committing to leave your money untouched for a longer time.
Instant Access
An instant access savings account lets you withdraw your savings at any time, and usually for free. For example, the business savings account from Tide pays interest at 4.07% AER variable and offers fee-free, instant-access to your funds via its mobile app.
Notice Accounts
A notice savings account is one where you have to let your bank know in advance if you want to withdraw your savings. This notice period could range from 30 to 180 days or more, and you might only be able to make a limited number of withdrawals each year.
Finally, here are three key questions to answer before you start saving.
Hopefully, you now have a good idea of what to look for as you search for the right business savings account. Let’s wrap up with three final details to stay on top in your research.
How Often is the Interest Calculated and Paid?
Many business savings accounts calculate interest daily, and pay it monthly. But this can vary among accounts and providers, with calculations and payments happening quarterly or annually instead. Understand your terms so you can set the right saving strategy.
What are the Deposit and Interest-Earning Balance Limits?
Many business savings account providers put a cap on how much you can deposit in your account. And those that let you make unlimited deposits will often only pay interest on a certain amount. Know the account terms in advance so you can plan appropriately.
Will You Need to Pay Tax on the Interest You Earn?
Savings interest is classed income if you’re a sole trader, and how much you can earn tax-free depends on your other income. If you’re saving for your limited company, savings interest is classed as company revenue and must be declared on the corporation tax return.
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