Many limited company contractors receive zero interest on their current account deposits – and derisory amounts of interest on their savings. Does this need to be the case?
General advice for choosing a bank account
In a previous article, we looked at the key things contractors should consider when choosing a company bank account. The main considerations include whether the company is eligible for ‘free banking’ offers, and what standing charges are levied once any free periods have expired.
There are also a number of measures you can take to reduce your ongoing banking costs, including opting out of paper statements in favour of web-based ones, using more automated payments than manual ones (e.g. cheques), and steering clear of unauthorised borrowing.
Comparing bank account charges
Companies and individuals alike are notoriously reluctant to change their banking providers. The perceived ‘hassle’ associated with making the switch is the main reason, although in reality, you should be able to port all your existing payment information between banks to minimise disruption.
The vast majority of current accounts pay nil or minimal interest currently, for obvious reasons, however, the transaction charges vary wildly between banking providers. For example, most accounts charge between 65p and £1 per cheque handled. However, some don’t charge at all for this service.
Until fairly recently, Santander offered free business banking on an ongoing basis, although they introduced a minimum £7.50 per month charge a few years ago as the free option “wasn’t viable”.
To make up for this, the bank now offers 0.25% interest on current account deposits. Start-up businesses can still qualify for up to 18 months’ free banking, as is the case with most high street banks.
Cater Allen has been a popular choice for contractors for many years. Owned by Santander, ironically, the reserve bank account for companies offers free banking for up to 30 transactions per month, but you must maintain a balance of at least £5000 to qualify. One downside is that you can only open this particular account via an intermediary, such as an accountant.
Most of the major banks offer free banking to new companies, however, we strongly advise that you compare the ongoing charges you will be faced with once the free period is over, as – like so many others – you may be reluctant to switch accounts once your business has become established.
New banks – genuinely free banking for contractors
In recent years, a new wave of challenger banks has emerged – offering a radical alternative to the traditional business banking model. These are primarily web-based banks, with great technology, and a low-cost base.
For example, Tide Banking provides 100% free business banking, and can set you up with a sort code and account number in as little as 5 minutes. In addition, Tide is compatible with the leading online accounting software providers, such as FreeAgent.
Also worth considering is the MyCashPlus account – which takes 5 minutes to apply for. You will have a sort code and business bank account number immediately, in return for a modest £69 annual fee.
What about business deposit accounts?
You can also compare business deposit accounts here. The top current rate is around the 2% mark, with some accounts offering instant access, and others requiring a notice period of between 30 and 180 days before cash can be withdrawn.
Rather than keeping surplus cash in your company’s current account (including future tax liabilities) earning between zero and 0.25% interest, you could benefit from significantly better rates by transferring funds to a deposit account.