Maximising Business Savings: A Tax Guide for UK Entrepreneurs

Arianna Colomb 21 January 2025 minute read

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If you're a small business owner, understanding how taxes apply to your savings is crucial. Properly managing your business savings can reduce tax burdens and protect your financial future. Here’s an easy-to-follow guide to help you understand different types of savings accounts and how taxes may vary based on your business structure.

Types of business savings accounts

Businesses have access to different types of savings accounts, each with unique benefits:

Standard Business Savings Accounts

These accounts provide immediate access to your funds while earning basic interest rates, ideal for managing day-to-day cash flow.

Fixed-Term Deposit Accounts

These accounts offer premium interest rates when you commit to leaving your money untouched for a predetermined period.

Notice Accounts

These accounts require advance notice for withdrawals (typically 30-90 days) but provide better interest rates than standard accounts.

When choosing a savings account, consider the needs of your business—whether you require quick access to funds or aim to earn higher interest by keeping money untouched for longer periods.

Are business savings accounts taxed?

Yes, business savings accounts are taxable in the UK. The tax treatment depends on the structure of your business. Tax laws may change, so confirm details with your accountant.

For Limited Companies:

According to GOV.UK, the interest earned on business savings is treated as part of the company’s profits and is subject to Corporation Tax. The current Corporation Tax rates for the tax year 2024/2025 are:

Main rate: 25% for companies with profits over £250,000.
Small profits rate: 19% for companies with profits under £50,000.
Companies with profits between £50,000 and £250,000 pay the main rate, reduced by marginal relief, providing a gradual increase in the effective Corporation Tax rate.

For example:

£2,000 interest + £30,000 profits = £380 tax (19% rate)
£8,000 interest + £100,000 profits = £2,000 tax (25% rate)

For Sole Traders:

As per GOV.UK, if you’re a sole trader, the tax-free allowances for savings interest for the tax year 2024/2025 depend on your total income:

Personal Allowance: Up to £12,570 in total income (including savings interest) is tax-free.
Starting Rate for Savings: If your other income is less than £17,570, you can earn up to £5,000 in savings interest tax-free.
Personal Savings Allowance: Depending on your income tax band:

Basic rate (20%): £1,000 tax-free savings interest.
Higher rate (40%): £500 tax-free savings interest.
Additional rate (45%): No Personal Savings Allowance.

Based on your income tax, you are likely to only pay tax on savings interest that exceeds these limits. Confirm your individual status with your accountant.

When do you pay tax on savings interest?

Tax on savings is usually calculated and paid annually, either through your self-assessment tax return (for sole traders and partnerships) or as part of your corporation tax return (for limited companies). If your business operates outside the UK, tax rules may differ significantly; consult a tax professional familiar with your jurisdiction.

Are business savings protected by the FSCS?

Not all business savings accounts are automatically protected under the Financial Services Compensation Scheme (FSCS). Small businesses and limited companies may qualify for protection, but it’s essential to verify that your financial institution is covered. Below, we break down how FSCS protection works for businesses:

Protection limits: FSCS protects eligible deposits up to £85,000 per financial institution. This limit applies per business entity, so if you have multiple accounts at the same bank or banks that share a banking license, the total protection is capped at £85,000.
Eligible businesses: Small businesses and limited companies are generally eligible for FSCS protection, provided the business is not classified as a large company or partnership. Eligibility is influenced by the nature of the business, including factors such as the structure of the business and types of accounts held. Businesses with an annual turnover of £1 million or less typically qualify, but meeting these criteria does not guarantee eligibility.
Temporary high balances: If your business temporarily holds a large deposit, such as proceeds from a property sale or a legal settlement, the FSCS provides protection for balances up to £1 million for up to six months. This allows coverage beyond the standard limit for exceptional situations.
Check your bank’s coverage: Not all banks or financial institutions are covered by FSCS. To confirm whether your deposits are protected, check the FSCS website or use the Financial Services Register to verify your bank's authorisation status.

For more detailed information, you can visit the FSCS official website or check specific details about deposit protection in their resources.

The bottom line

Business savings accounts are taxed differently depending on your business structure. Limited companies are taxed at the corporation tax rate (currently 25% for most companies, with a reduced rate of 19% for those with profits under £50,000).
Sole traders have savings interest added to their personal income, subject to income tax, but the personal savings allowance (up to £1,000 for basic-rate taxpayers) can reduce the amount of tax owed on savings interest.
FSCS protection covers your business savings up to £85,000 per financial institution, with certain limits and conditions, including higher protection for temporary high balances.

Understanding how taxes work for your business savings can help you make smarter financial decisions, ensuring you pay the right amount of tax and keep more of your hard-earned money for your business’s growth.