How to use a business savings account effectively

A business savings account makes it easier to build up a nest egg for your business by separating your savings from your main business bank account. Having money set aside in this way allows you to plan ahead and reduces the likelihood of unexpected expenses landing your company in financial hot water.

How should I use a business savings account?

A business savings account lets you separate money you want to put away from the operating funds required to keep your company afloat. 

This separation makes it easier to save up for everything from big purchases and investment opportunities to payouts for unforeseen events and expenses. 

In most cases, you also earn interest at a higher rate than on a business bank account, meaning you can grow your savings more quickly by using a business savings account.

Several types of business savings accounts are available. The best one for you will largely depend on how much access you need to your business savings, as well as how much you have to deposit in the account.

The different types include:

• Instant or easy access accounts – these accounts let you dip into your business savings when you want but generally pay lower interest rates than accounts with withdrawal conditions

• Notice accounts – these accounts usually require you to give seven to 180 days’ notice when you want to make a withdrawal but offer higher interest rates in return

• Fixed-term accounts – with terms ranging from six months to five years, these accounts pay the best interest rates but impose penalties if you make a withdrawal before the term ends

Read more:

• What is a business savings account?

• How much should you have in your account?

What is the best way to manage business savings?

If you have a limited company, you are legally required to keep your business and personal finances separate. This means you’ll need to keep business savings in a dedicated business savings account rather than a personal one.

However, if you’re a sole trader, you can move money between your business and personal accounts, meaning you can use a personal savings account to house your business savings.

Either way, as with personal savings, the best way to save for your business is to put money away regularly. Once you’ve worked out how much you can afford to save per month, it’s sensible to set up a standing order to automatically transfer that amount from your main account to your savings account. 

To maximise your savings returns, you also need to shop around for the best business savings account for your needs. 

The aim is to earn as much interest as possible, but you also need to ensure you are not overpaying for account fees and have suitable access to your savings pot.

How much should a business have saved?

The amount you need to put away for your business depends on your savings goals. 

For example, if you want to buy new business premises, you’ll need to save significantly more than if you simply want a buffer to cover unexpected outlays.

Common savings goals for businesses include:

• Paying an annual tax bill

• Paying VAT (if your business is VAT registered)

• Paying off debts

• Buying new equipment

• Acquiring a rival business

When it comes to ‘rainy day’ savings, meanwhile, it’s a good idea to have enough in your business savings account to cover between three and six months’ worth of operating expenses.

That way, you’ll be well-placed to manage any difficult situations that could arise.

Read more:

• How to save as a business

• Pros and cons of business savings accounts

Why is saving money important for businesses?

The future success of your business depends on having enough capital to weather any financial storms, such as equipment malfunctions or losing your biggest client.

Saving also allows you to take advantage of any business opportunities that arise. You can also plan for future expenses or expansion without relying on borrowing money. And if you do need credit, having a healthy business savings account balance can help you qualify for better deals on business credit cards and business loans.

Are business savings taxed?

Business savings accounts pay interest gross, meaning before tax. Therefore, you must declare any earned interest on your annual tax return.

Sole traders can use their personal savings allowance to reduce the tax they pay on their business savings interest. The allowance permits basic-rate taxpayers to earn £1,000 a year in interest before tax, while higher-rate taxpayers can earn £500 before tax. Additional-rate taxpayers don’t have a personal savings allowance. 

You must pay any tax owed on interest earned over and above your allowance to HMRC. On the other hand, limited company owners must pay corporation tax on any profits, including interest earned on business savings.