What are business bonds?
Business bonds work in the same way as personal savings bonds – but are owned by the company, not an individual.
With a business bond, you agree to lock the money away for a set period; for instance, one, two or three years. In return, these bonds tend to pay higher rates of interest than easy-access business savings accounts. The rate is fixed, so you’ll know exactly what will earn over the term of the bond. Usually, longer-term bonds pay higher rates.
You typically can’t make withdrawals during the term of the bond. If you do need to access the money, you’ll usually lose some or all of the interest you’ve earned. You may also be forced to close the account.
Should I lock my money away?
To choose the right savings account for your business, you should think carefully about your projected cashflow. It all comes down to whether the money might be urgently needed. Generally, the longer you can lock the cash away, the better the rate you’ll get.
But locking your money away is only a good idea if you’re confident you won’t need it for the duration of the term. If you suddenly need to access the cash, you might have to pay substantial penalties. Sometimes you might lose all the interest you would have earned, meaning you’d have been far better off with your money in an easy access account.
Usually, it makes sense to have a mixture of savings, some in easy access business accounts – so the company can withdraw the money in an emergency, and some in fixed term products like bonds that pay higher interest.
Another option is a notice savings account. These pay higher rates than easy access accounts, but you can still get money out subject to a notice period, such as 30, 90 or even 180 days.
Will I pay tax on savings?
You’ll need to pay tax on the interest you earn through your business savings account.
If you have a limited company, you’ll pay corporation tax on any interest you earn. The advertised savings rates are gross, so you’ll have to deduct the tax from that. The amount you need to pay will be calculated in your end of year financial statements, and you’ll then have 9 months to pay it.
If you’re a sole trader, you’ll pay income tax at your marginal rate. However, if you’re a basic rate taxpayer, you get a £1,000 savings allowance, so any interest under this amount is tax free. Higher rate taxpayers have a £500 allowance, while additional rate payers don’t have one at all. You’ll calculate what you owe as part of your annual self-assessment.
Are bonds protected by the FSCS?
Small businesses need to meet certain criteria to claim from the Financial Services Compensation Scheme (FSCS). However, the scheme says that if a UK-authorised bank, building society or credit union fails, it will automatically compensate each eligible company depositor up to £85,000.
Small business owners can check if they are covered on the FSCS website.
Business bonds are a great way to earn a high rate of interest, but money has to be locked away for a set period. Typically, the longer the term of the bond, the more money you’ll make. The penalties for early access can be harsh, so you should only consider buying business bonds if you’re sure you won’t need the money for the duration of the term.
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