Are retained profits sitting in the company bank account creating a headache? Small business owners often ask whether to move excess corporate cash into tax-efficient personal savings such as ISAs or into NS&I Premium Bonds. The choice affects taxes, liquidity and corporate governance — and the wrong move can raise compliance issues or leave the business short of working capital.
This guide explains, in plain English, the practical steps, tax consequences and cashflow considerations when comparing ISAs and Premium Bonds for funds that originate as retained profits. It focuses exclusively on small business owners deciding what to do with retained profits rather than general retail saving advice.
Key takeaways: what to know in one minute
- Retained profits cannot be held in an ISA or Premium Bonds while still inside the company. Funds must be extracted to an individual before using personal ISAs or Premium Bonds.
- Extraction route matters for tax efficiency. Corporation tax, National Insurance, and personal tax on dividends or salary affect the net amount available to deposit into an ISA or buy Premium Bonds.
- ISAs offer predictable tax-free returns (or access to growth) but depend on product type (cash, stocks & shares). Premium Bonds offer tax-free prize draws with no guaranteed yield; the effective return is probabilistic and variable with the prize rate and interest-rate environment.
- Liquidity and company solvency must be prioritised. Withdrawing too much can harm trading cashflow and expose directors to solvency or wrongful distribution issues.
- Consider alternatives first. Pension contributions, reinvestment, or paying down business debt may be more tax-efficient than extracting profits for private saving.
Should small business owners park retained profits in an ISA?
Retained profits are company assets. They cannot directly be placed into a personal ISA. To use an ISA, the owner must extract money from the company as salary, dividend or loans and then fund the ISA from personal after-tax cash. The key questions are: is extracting the cash the best route tax-wise, and will the company remain solvent after the withdrawal?
- Extraction tax impact: Corporation tax is paid on company profits first. Then extraction (salary/dividend) triggers further taxes at the personal level. For details on corporation tax rates and HMRC guidance see HM Government: corporation tax rates.
- ISA allowance: The individual ISA allowance for 2026/27 is indicative and should be checked on GOV.UK: ISAs. If the owner has available allowance, personal cash can be sheltered from further income tax on interest or from capital gains for stocks & shares ISAs.
- Practical steps: Confirm available ISA allowance, decide extraction route, account for employer obligations (PAYE, NICs), withdraw net cash and deposit to an ISA within tax-year limits.
When it makes sense: parking extracted profits in an ISA often suits owners who need personal liquidity, expect low to moderate market returns, and value certainty of tax treatment on interest and gains. If the owner wants safer capital preservation, a Cash ISA (from permitted providers) can be appropriate; for growth, a Stocks & Shares ISA may be better despite market risk.
Comparing tax-free ISA returns versus Premium Bonds prizes
Both ISAs and Premium Bonds provide tax-free outcomes for UK taxpayers, but the mechanics differ.
- ISAs: Interest in Cash ISAs and gains/dividends in Stocks & Shares ISAs are tax-free at the personal level. Returns are deterministic (interest rate or investment performance) and visible. The effective post-tax yield is simply the nominal yield since tax is not applied.
- Premium Bonds: Premium Bonds (NS&I) enter each bond into monthly prize draws with a variable prize fund rate; prizes are tax-free. There is no guaranteed interest equivalent; the expected return equals the published prize fund rate but individual outcomes are random.
Practical comparison table (indicative rates 2026):
| Feature |
Cash ISA (estimate) |
Premium Bonds (NS&I) |
| Nature of return |
Fixed or variable interest paid by bank |
Tax-free prizes via monthly draws |
| Predictability |
High (rate known) |
Low — stochastic outcomes |
| Access to capital |
Instant to short notice |
Usually next working day to cash out, but monthly draw timing differs |
| Tax treatment |
Tax-free on interest/growth |
Prizes tax-free |
For small business owners, the comparison must start after all extraction taxes are paid. Example: a company with £100k retained profit pays 25% corporation tax (illustrative), leaving £75k. If the director extracts £75k as a dividend, personal tax reduces that further — the net that reaches the personal ISA or Premium Bonds will be significantly lower.
For current NS&I Premium Bonds prize fund rates and guidance see NS&I: Premium Bonds.
Risk, liquidity and access: ISA or Premium Bonds?
Risk appetite and the need for access to funds are often decisive for business owners.
- Risk profile: Cash ISAs offer low nominal risk (subject to provider failure risk beneath FSCS protection limits). Stocks & Shares ISAs carry market risk. Premium Bonds carry capital security (backed by the UK Treasury via NS&I) but no guaranteed yield.
- Liquidity: Cash ISAs typically allow immediate access (some fixed-rate ISAs restrict early withdrawals). Premium Bonds can be cashed in quickly but prize draws continue until redemption; large redemptions are handled by NS&I on request. For urgent access, a Cash ISA often provides clearer timings.
- FSCS and Crown backing: Cash in banks/building societies is protected up to £85,000 by the Financial Services Compensation Scheme (FSCS). NS&I is backed by HM Treasury and is considered effectively sovereign-backed for Premium Bonds. For FSCS information visit FSCS.
Directors should map business cashflow needs and maintain a cautious liquidity buffer before extracting profits. Using retained profits to fund personal savings risks leaving the company undercapitalised.
Tax implications for retained profits placed in ISAs
Important: retained profits must be distributed from the company before they can be placed into an ISA. The extraction route determines tax drag.
- Salary: Deductible expense for the company but attracts employer NICs and PAYE. Net cash may be reduced after personal income tax and NICs.
- Dividends: Paid from post-tax profits (after corporation tax). Dividends have a tax-free allowance and then are taxed at dividend rates which vary by band. Dividends generally avoid NICs.
- Director’s loan account: Returning funds to directors from loans can be complex and may trigger tax charges if not settled correctly.
Example scenario (indicative, 2026):
- Company profit before tax: £100,000
- Corporation tax (illustrative 25%): £25,000 → retained profit £75,000
- Dividend distribution of £75,000: owner receives £75,000 then pays dividend tax depending on marginal rate; after-tax amount might be ~£60,000 (varies by personal band)
Only the after-tax amount can be subscribed into an ISA. Therefore the apparent benefit of tax-free ISA growth must be weighed against the double taxation (corporation tax + extraction tax) required to get money out of the company.
For dividend tax bands and up-to-date rules, consult GOV.UK: dividend tax.
How inflation and interest rates affect Premium Bonds
Premium Bonds prizes are funded by a prize fund rate which tends to track underlying interest rate conditions. When Bank Rate rises, prize fund rates often increase — improving expected returns — but results for any individual bond remain uncertain.
- Real value erosion: If inflation exceeds the expected prize fund or Cash ISA rates, real value declines for nominal balances. Owners should consider whether the expected return (or likely prize rate) preserves purchasing power.
- Prize distribution variance: Average return can be modelled, but the distribution is skewed: many bonds win nothing while a few win large prizes. For planning purposes, Premium Bonds are not reliable if steady income or guaranteed real return is required.
For NS&I prize rate methodology see the NS&I site: NS&I prize fund.
ISA allowances and Premium Bonds limits explained
- ISA allowance: The annual ISA subscription limit is set by the government each tax year. The current allowance is indicative and should be confirmed at GOV.UK.
- Premium Bonds limits: NS&I sets a maximum holding per person (check current limits on the NS&I site). These limits determine how much of extracted retained profits can be held in Premium Bonds.
Because only personal cash can be placed into ISAs or Premium Bonds, the company cannot directly bypass tax or limits by 'naming' the company as holder. Directors should model different extraction amounts and compute net proceeds after taxes to determine how much can go into tax-free wrappers.
Practical step-by-step: moving retained profits to personal savings (checklist)
- Confirm company cash position and maintain a minimum working capital buffer.
- Calculate corporation tax due and confirm profit available for distribution.
- Choose extraction method (salary/dividend) and estimate employer/employee taxes — consult an accountant.
- After extraction and payment of taxes, verify personal ISA allowance and Premium Bonds limit.
- Subscribe to ISA or buy Premium Bonds using personal funds; retain records for compliance.
Note: Directors must avoid distributions that render the company insolvent or constitute unlawful dividends. Professional tax and legal advice is recommended for material distributions. The FCA provides guidance on savings and investor protections at FCA.
Decision flow: retained profits → ISA or Premium Bonds?
💼 Step 1 → Check company liquidity and statutory obligations (taxes, payroll, creditors)
🔢 Step 2 → Calculate net extraction (after corporation tax and personal tax estimates)
📊 Step 3 → Compare options: Cash ISA (predictable), Stocks & Shares ISA (growth risk), Premium Bonds (variable prizes)
✅ Outcome → If priority is certainty and short-term access, Cash ISA; if growth and long-term, Stocks & Shares ISA; if tax-free lottery-style returns acceptable, Premium Bonds
Advantages, risks and common mistakes
Benefits / when to apply
- ✅ Tax-free growth in ISAs can preserve gains and interest at the personal level after extraction taxes are paid.
- ✅ Premium Bonds offer sovereign-backed capital with tax-free prizes and can be a low-maintenance option for small amounts.
- ✅ Using ISAs may be preferable when seeking predictable returns or utilising allowance each tax year.
Errors to avoid / risks
- ⚠️ Extracting too much and weakening the company's working capital.
- ⚠️ Ignoring employer/NIC obligations when paying salary.
- ⚠️ Treating Premium Bonds as a guaranteed income source; the prize is random and may yield low returns for many holders.
- ⚠️ Assuming company money can be directly shielded inside personal ISAs — legal extraction is required first.
Frequently asked questions
Can a company buy Premium Bonds for a director?
No. Premium Bonds are a personal product. The company cannot hold Premium Bonds in its corporate name; an individual must buy them. Any corporate purchase for a director would be treated as a benefit in kind and must be accounted for.
Tax depends on corporation tax, the chosen extraction route (salary or dividend), and the individual's marginal rates. Exact figures require calculation with current rates; consult an accountant or GOV.UK resources.
Are Premium Bonds better than cash ISAs in high inflation?
Not necessarily. Premium Bonds' expected return is tied to the prize fund rate which varies; there is no guaranteed inflation-beating yield. Cash ISAs with competitive rates may better preserve real value if rates exceed the NS&I prize fund.
Directors must avoid distributions that render the company unable to pay debts as they fall due. Wrongful or unlawful distributions can lead to personal liability. Professional legal and accounting advice is essential for material extractions.
Can retained profits be used for pension contributions instead?
Yes. Employer pension contributions can be tax-efficient, reducing corporation tax base and avoiding immediate personal tax on extraction. This is often more tax-efficient but must be considered against business cashflow needs.
How quickly can Premium Bonds be cashed in?
Redemption is typically processed quickly by NS&I however, prize draws continue until redemption and large sums may require verification. Check NS&I terms at NS&I.
Do ISAs protect from HMRC enquiries about distributions?
No. Placing money into an ISA does not shield the legality of the underlying extraction. Directors must keep accurate records and ensure distributions comply with company law and tax rules.
Conclusion
Deciding whether to place funds originating as retained profits into ISAs or Premium Bonds depends first on how the money is extracted and second on priorities: certainty, liquidity, or chance-based tax-free prizes. For many small business owners, the most tax-efficient route may be non-extraction options such as pension contributions or reinvestment in the company.
Next steps
- Review the company's cashflow and set a minimum working-capital buffer before any extraction.
- Run extraction scenarios with an accountant to model corporation tax, NICs and dividend tax, and the net amount available for ISAs or Premium Bonds.
- Compare expected after-tax outcomes (Cash ISA, Stocks & Shares ISA, Premium Bonds) and decide based on liquidity needs and risk tolerance; document the decision and retain professional advice.
References: GOV.UK (ISA and dividend guidance), NS&I (Premium Bonds), FCA, FSCS. All tax and rate figures are indicative at time of writing; consult HMRC and official sources for current figures.