If you’ve recently started a limited company or are considering forming one, you may be wondering about the safety of your company’s funds. Specifically, are limited company bank accounts protected?
The short answer is yes, but the level and type of protection depend on the bank, the type of account, and the Financial Services Compensation Scheme (FSCS). In this article, we’ll explain how bank accounts for limited companies are protected, what this protection covers and why keeping your business and personal finances separate is important.
How Are Limited Company Bank Accounts Protected?
Limited company bank accounts in the UK are typically covered by the Financial Services Compensation Scheme (FSCS), but there are some conditions to be aware of.
1. FSCS Protection
The FSCS provides compensation of up to £85,000 per eligible financial institution if the bank, building society or credit union fails. This protection applies to both personal and business accounts, including limited company accounts, but there are specific criteria:
- The company must be classified as a small business under FSCS rules.
A small business is typically defined as meeting at least two of the following three criteria:- Annual turnover of less than £10.2 million.
- Fewer than 50 employees.
- A balance sheet total of less than £5.1 million.
If your limited company qualifies as a small business, its bank account is eligible for FSCS protection.
2. Separate Financial Institutions
The £85,000 protection applies per financial institution, not per account. If your limited company has accounts with multiple banks, each institution’s accounts are covered up to £85,000. However, if the banks operate under the same banking license, the protection is shared between them. It’s worth checking whether your bank is part of a group or shares a license with other brands.
Why Keep Business and Personal Accounts Separate?
A limited company is a separate legal entity from its owners, so its finances must be kept distinct from personal accounts. Here’s why this is essential:
1. Legal and Financial Clarity
- Mixing personal and business finances can lead to confusion and make it difficult to track your company’s income, expenses and profits. This can cause problems when filing accounts or tax returns.
2. Compliance with HMRC
- HMRC expects limited companies to maintain separate records and accounts. Using a dedicated business account simplifies compliance and reduces the risk of errors during audits.
3. Liability Protection
- One of the key benefits of a limited company is limited liability, meaning your personal assets are protected if the company incurs debts. Mixing accounts can blur this distinction, potentially putting your personal assets at risk.
Are There Risks to Limited Company Bank Accounts?
While protections like the FSCS provide peace of mind, it’s important to understand potential risks:
1. Bank Failures
Although rare, banks can fail. FSCS protection mitigates this risk for small businesses, but for larger companies with balances exceeding £85,000, funds above this threshold are not covered. Diversifying accounts across different banks can help reduce this risk.
2. Fraud and Cybersecurity Threats
Business bank accounts can be targeted by fraudsters. To protect your account:
- Use strong passwords and two-factor authentication.
- Regularly monitor your account for suspicious activity.
- Educate employees about phishing scams and other fraud risks.
3. Bank Charges and Fees
Business accounts often have higher fees than personal accounts. Compare options to find an account that meets your company’s needs without excessive costs.
Choosing the Right Bank Account for Your Limited Company
When selecting a bank account for your limited company, consider the following factors:
- FSCS Eligibility Ensure the bank is covered by the FSCS and that your business qualifies for protection under the scheme.
- Banking Features Look for features that support your business needs, such as online banking, integrations with accounting software, and dedicated customer support.
- Fees and Charges Compare account fees, including transaction charges, monthly fees, and additional costs for services like overdrafts or international transfers.
- Reputation and Security Choose a bank with a strong reputation for financial stability and robust security measures.
Additional Protection Measures
Beyond FSCS, you can take proactive steps to safeguard your company’s funds:
- Spread Funds Across Banks: If your company’s balance exceeds £85,000, consider opening accounts with different banks to ensure full protection.
- Insurance: Some companies opt for business insurance policies that include coverage for financial loss due to fraud or cyberattacks.
- Regular Audits: Regularly review account activity to identify and address any discrepancies early.
Conclusion
Yes, limited company bank accounts in the UK are protected, primarily through the Financial Services Compensation Scheme (FSCS). However, the level of protection depends on your company’s classification as a small business and the bank’s licensing arrangements. Keeping your business and personal finances separate is not only a legal requirement but also a best practice for managing and safeguarding your company’s assets.