A Full Guide to Tax on Business Savings
Managing finances effectively is essential for any business, and understanding the tax rules on business savings accounts is a crucial aspect of financial planning. In the United Kingdom, businesses must navigate the complexities of taxation when it comes to their savings. In this beginner’s guide, we will explore the tax rules on business savings accounts in the UK, providing valuable insights to help you make informed decisions and optimise your savings strategy.
What are Business Savings Accounts?
There are plenty of business savings accounts that you can consider. There are differences in interest rates, accessibility, and online tools. So you first job should be to decide which savings account is right for you?
Business savings accounts are specifically designed for businesses to save and earn interest on their surplus funds. These accounts provide a secure and separate place to hold excess capital, allowing businesses to earn interest while maintaining liquidity. Understanding the tax rules on business savings accounts is essential for businesses to comply with tax regulations and maximise their savings.
Tax on Business Savings: Interest Income
One key aspect of tax on business savings accounts is the treatment of interest income. In the UK, the interest earned on business savings is subject to taxation. It is important to note that interest income is considered part of a business’s taxable profits and is subject to income tax or corporation tax, depending on the business structure.
For sole traders and partnerships, interest income is taxed as part of the individual’s personal income and should be reported on the relevant self-assessment tax return. For limited companies, interest income is subject to corporation tax and should be included in the company’s annual tax return.
Depending on your overall earnings or profit dictates how much tax you will pay on your interest.
Tax-Free Allowances and Personal Savings Allowance
To support small businesses, the UK government provides tax-free allowances and a personal savings allowance for business savings accounts. These allowances determine the amount of interest income that can be earned without incurring tax liabilities.
As of 2023, the personal savings allowance allows basic rate taxpayers to earn up to £1,000 in interest income tax-free. Whereas higher rate taxpayers have a tax-free allowance of £500. Additional rate taxpayers do not have a personal savings allowance and are taxed on all interest income.
| Tax on Interest Earned | Basic Rate Taxpayers (up to £50,270 annual earnings) | Higher Rate Taxpayers (up to £125,140 annual earnings) | Additional Rate Taxpayers (above £125,140 annual earnings) |
| £500 Interest Earned | £0 | £0 | £225 |
| £1,000 Interest Earned | £0 | £200 | £450 |
| £2,000 Interest Earned | £200 | £600 | £900 |
Taxation of Business Savings for Limited Companies
For limited companies, the tax treatment of business savings accounts differs slightly. Interest income earned by a limited company is subject to corporation tax. The interest income should be included in the company’s annual tax return, along with other sources of income and expenses.
It is important for limited companies to keep accurate records of their interest income and any associated expenses to ensure proper calculation of their taxable profits. Working with an accountant or tax advisor can help businesses navigate the complexities of corporation tax and ensure compliance with tax regulations.
Because of the changes in the way Corporation Tax is calculated in 2023. The amount of tax due on your interest will depend on your overall profit for the year.
You will pay anything between 19% – 25% tax on your interest income as a limited company.
Tax-Advantaged Business Savings Accounts
In addition to traditional business savings accounts, there are tax-advantaged options available to businesses. Two notable examples are the Individual Savings Account (ISA) and the Innovative Finance ISA (IFISA).
ISAs offer tax-free savings and investments, including cash savings. However, it is important to note that ISAs have individual limits, and the amount that can be saved in an ISA is subject to annual allowances.
The annual allowance is currently set at £20,000 per year. Meaning you can only save up to £20,000 in a 12 month period. If you contribute more than the £20,000 limit to your savings, all of the interest you earn will become taxable.
IFISAs, on the other hand, are specifically designed for peer-to-peer lending investments. While they offer the potential for higher returns, it is crucial to carefully assess the associated risks before considering this option.
Seeking Professional Advice
Navigating the tax implications of business savings accounts can be complex, and seeking professional advice is highly recommended. An accountant or tax advisor can provide valuable guidance tailored to your specific business circumstances, ensuring compliance with tax regulations, and optimising your savings strategy.
Conclusion
Understanding the tax implications of business savings accounts in the UK is vital for businesses to manage their finances effectively and optimise their savings strategy. By recognising the tax treatment of interest income, tax-free allowances, and exploring tax-advantaged options, businesses can make informed decisions and maximise their savings while ensuring compliance with tax regulations. Remember, seeking professional advice is always a prudent step to navigate the complexities of tax. It will be vital to your businesses financial success.
