Could your business bank accounts be holding you back from £10,000s in interest?

For business owners, keeping large amounts of cash in a business bank account can feel like the safest option. The money is readily accessible, and provided it’s held with an eligible institution, some of it will be protected by the Financial Services Compensation Scheme (FSCS).

However, once you factor in tax, inflation, and the limits of FSCS protection, the headline interest rate may not tell the whole story.

If you're holding hundreds of thousands of pounds in business cash, there could be other ways to keep your money secure and generate returns without taking on significant investment risk.

Read on to find out how your business bank accounts could be holding you back.

Large cash balances may not be as secure as they seem

Many businesses hold hundreds of thousands of pounds in cash as a buffer for challenging periods, unexpected costs, or future investment. This can be a sensible approach to managing your business's finances, but there are two key risks to consider:

• The limits of FSCS protection

• Inflation

Since December 2025, the FSCS has protected eligible deposits up to £120,000 per company, per authorised firm. This includes money held in current, savings, and fixed-term deposit accounts.

If your business holds significantly more than £120,000 in cash, this means some of its deposits could be exposed if the bank fails.

One way to manage this risk may be to spread cash across multiple authorised firms. However, it's important to check whether different banking brands operate under the same banking licence, as deposits held across brands sharing an authorisation are generally treated as being with the same firm for FSCS purposes.

There is also the risk posed by inflation.

Even when your cash is earning interest, rising prices can gradually reduce what that money is worth in real terms. So, while keeping cash can provide security and flexibility, it’s worth considering whether all of your business's cash needs to remain in an ordinary bank account.

Depending on your circumstances and how quickly you may need access to the money, alternatives could include:

• Fixed-term savings accounts with higher rates of interest

• Short-term government bonds

• Other investments appropriate to your business's circumstances and risk tolerance

Each option has different risks, returns, and tax implications, so it's important to speak to a financial planner before making a decision.

The interest rate on your account isn't necessarily your real return

Aside from the potential risks that inflation or FSCS protection limits could pose, it’s also important to factor in the tax rate and actual return on your account.

For instance, a savings account offering a headline interest rate of 4.5% might sound attractive. But the rate alone doesn't tell you how much value your business is actually gaining.

Interest earned by a limited company is generally taxable as part of its profits, meaning the amount your business keeps after tax can be significantly lower than the headline rate.

For example, £300,000 earning 4.5% would generate £13,500 in interest over a year before tax.

If that interest were taxed at the main Corporation Tax rate of 25%, the company would be left with £10,125, equivalent to a net return of about 3.38%.

Then, once you factor in inflation, the real return falls again. If inflation were 2.9%, as it is at the time of writing, the £300,000 would need to grow by approximately £8,700 simply to maintain its purchasing power.

This is why looking at the after-tax, inflation-adjusted return can give you a much clearer picture than simply looking at the interest rate advertised by a bank.

Government bonds could offer a secure and potentially more efficient alternative

If your business holds large amounts of cash, short-dated government bonds could provide an alternative to keeping all of the money in a savings account.

These are essentially loans to the UK government that have a fixed maturity date, when the government repays the original amount, and can pay interest during the period you hold them.

UK government bonds are generally considered to have very low risk, so they could provide an alternative for some of the money you might otherwise hold above the FSCS protection limit. Also, because they have a fixed maturity date, you can lock in a return, which can be very useful if you have an expense to pay at a certain date.

Moreover, depending on the bond, its purchase price and maturity date, it could offer a more attractive return than a savings account.

Of course, gilts aren't the right option for every business. Their value can fluctuate if they're sold before they mature, and there are other factors to consider when deciding whether they're suitable. As such, it's important to seek professional advice before making an investment decision.

Cash still has an important role

None of this means that holding cash is necessarily a bad idea.

Cash can be an important part of financial planning, particularly when you need to know that money will be available when you need it. This could be the case if you're:

• Planning a significant purchase

• Expecting to pay a large tax bill

• Building an emergency fund

The key question is how much cash you need and where the most appropriate place to hold it is.

Keeping enough cash to cover your short-term needs can provide valuable security and flexibility. But if you're holding significantly more than you need, it could be worth exploring whether some of that money could work harder for your business.

Get in touch

A financial planner can help you assess your cash requirements and consider the options available based on your circumstances, time horizons, and risk tolerance.

To speak to a financial planner, get in touch.

Email info@mlpwealth.co.uk or call us on 020 8296 1799.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.