Contractors and small business owners concerned about the safety of their cash deposits if their bank or building society fails can take solace in the fact that they are protected, up to a point.
Savers’ deposits of up to £85,000 are protected by the Financial Services Compensation Scheme (FSCS) in the event that the financial institution holding their savings cannot pay.
The FSCS aims to pay out within seven days of a bank or building society failing. Those affected don’t need to action their own claim when their financial institution fails, as the FSCS will identify them and initiate proceedings. However, you would be wise to ensure that your financial institution is covered, and that your deposit meets eligibility requirements.
Are my personal savings protected by the FSCS?
Contractors’ personal savings of up to £85,000 are guaranteed, as long as those savings are with a bank, building society or credit union protected by the FSCS.
The limit applies to each saver’s total deposits in a financial services firm, regardless of how many accounts they have or whether those accounts are in single or joint names. This means that a couple with a joint account would be covered to a combined total of £170,000.
If a contractor has more than £85,000 saved and the bank could not pay, then any additional money received above the £85,000 would depend on how much money was raised when the financial institution was liquidated. Depending on the circumstances, this could range from the entire sum, to nothing at all, or anywhere in between.
Compensation for deposits is paid gross. This means that any liabilities that you may owe to your financial institution, such as a mortgage or a loan, won’t factor in should you need to submit a claim.
FSCS protection for contractor business banking deposits
Although the FSCS was created to assist individual consumers, business deposits are also generally protected up to £85,000. Unlike with investment claims, the FSCS doesn’t discriminate by company size when it comes to eligibility for business deposit protection.
Rather, all that a company needs to do is be able to prove that the deposit is an eligible deposit as defined by the Prudential Regulation Authority’s (PRA) Depositor Protection Rules.
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:
- a UK establishment of a DGS member (such as a UK bank or building society); or
- a branch of a DGS member established in another European Economic Area (EEA) State under an EEA Right.
As with individual deposits, business deposits are protected up to a limit of £85,000, meaning if a contractor has more than £85,000 in their business bank account and their bank fails, then they could potentially lose any cash in the account above £85,000.
However, it does provide contractors with another avenue of protection to explore. For example, a contractor with up to £170,000 in savings could protect the full sum by dividing it between an individual deposit and a business deposit.
What happens if my bank becomes insolvent?
If a contractor has a personal or business account with a bank or building society that becomes insolvent, the FSCS would contact the contractor directly with an application form.
Contractors should check that their bank or building society is covered by the FSCS by searching online. You can check the Financial Services Register to see if your deposit-taker is authorised by the PRA to accept deposits.
For many contractors, the £85,000 limit may fall well short of their net cash assets. This is why in order for contractors to ensure that they receive compensation up to the limit of £85,000, it is advisable to set up multiple accounts with deposit-takers protected by the FSCS. But, please be sure to consult with a financial adviser before making any decisions about moving investments and cash deposits.
Protecting earnings through advance payments to HMRC
A savvy alternative method to secure the safety of a portion of your contract earnings is to make early Corporation Tax payments to HMRC. Anecdotal evidence suggests that some limited company contractors have been doing exactly that.
Not only does making advance payments mean their money is ‘safe’ with the taxman, but HMRC even pays taxable interest on the overpayment.