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How to protect your business bank account savings with FSCS

Limited company contractors concerned about the safety of cash held on deposit in their business bank account are covered by the same protections under the Financial Services Compensation Scheme(FSCS) that protects cash bank deposits held by individual savers.

A contractor’s limited company would receive compensation for deposits held up to a limit of £85,000, providing their bank or building society was covered by the FSCS.

Unlike in previous years, umbrella company contractors may also be eligible for the same protections. The FSCS has scrapped the ‘small business’ criteria that once governed eligibility for business bank deposit protection, meaning umbrella companies that do not qualify as ‘small’ under the Companies Act can now qualify for compensation.

Protecting your limited company bank deposits with FSCS

By banking their profits, saving for corporation tax, and amassing sums to cover ‘holiday pay’ and spells out of contract, contractors can very quickly accumulate large cash deposits in their business bank accounts. These could be at risk if their business banking provider were to become insolvent.

Fortunately, the FSCS provides the same level of compensation for a small company that individual savers enjoy, which is up to £85,000. Assessing whether you qualify for FSCS protection is a two-fold and relatively simple process:

  1. Check that the financial institution holding the money is protected by the FSCS
  2. Ensure that the deposit is an eligible one.

The Financial Conduct Authority (FCA) holds a register detailing all companies protected by the FSCS, which can be found here. The Prudential Regulation Authority’s (PRA) Depositor Protection Rules determine whether a deposit is eligible. Rule 2.2 explains the eligibility criteria in detail, and there are some caveats. However, generally, a deposit is an eligible deposit if it is held by:

  1. a UK establishment of a DGS member (such as a UK bank or building society); or
  2. a branch of a DGS member established in another European Economic Area (EEA) State under an EEA Right.

Under these criteria, it is highly unlikely that a cash deposit made by a contractor with a protected financial institution wouldn’t qualify for compensation.

How to guarantee protection for sums in excess of £85,000

If a contractor has more than £85,000 held by one bank and the bank fails, the contractor’s business would not be compensated for cash on deposit above the £85,000 threshold. This is because the ‘compensation licence’ held by each bank stipulates that a company can only benefit from compensation coverage once.

Contractors who have saved up sums in excess of £85,000 can address this issue by spreading their cash across different banks, which all hold separate compensation licences.

For example, a contractor with £130,000 on deposit could place £85,000 in one business bank account and the remaining balance, £45,000, in another account with a different bank, providing that bank has a separate banking license. This would ensure that, in the event of one or both banks failing, the contractor’s money would be safe.

Compensation licences: which banks should I save money with?

Not all banks trading in the UK and offering business bank accounts are members of the Financial Services Compensation Scheme (FSCS). Some overseas banks have no such guarantee.

Complicating matters further is the fact that different brands or trading names may belong to the same banking group, which may only have a single ‘compensation licence’.

For example, a contractor might think that having individual savings accounts with Bank of Scotland and Halifax is spreading the risk. However, at the time of writing, both these brands share the same single licence.

Contractors should check with each bank where they have a business account to ensure they don’t share the same licence. Alternatively, there are online resources that provide up-to-date lists of banks and licences.

Am I eligible for FSCS protection as an umbrella company contractor?

Up until recently, the situation for umbrella company contractors would have been potentially very different. Previously, eligibility for business bank deposit protection hinged on whether a business was a ‘small company’ as defined by the Companies Act 2006. This requires a company to fulfil two of the following three criteria:

  • A turnover of no more than £10.2m
  • A balance sheet total of no more than £5.1m
  • No more than 50 employees.

Most umbrella companies would struggle to meet these criteria, leaving contractors at risk in the event that they are owed a significant amount of money by their umbrella company.

Fortunately, this is no longer the case. However, umbrella company contractors are still advised to follow best practice and question their umbrella solutions provider if:

  1. it does not pay them within a few days of submitting timesheets; or
  2. won’t pay its contractors until they are paid by the agency or client.

Umbrella company contractors should never allow large sums owing to them to build up. It could be an indicator that their umbrella company is in financial trouble, in which case it’s best to find an alternative solutions provider.

Updated: 02 July 2019

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