Are business credit card rewards worth it?

How Business Credit Card Rewards Work: A Quick Guide

Understanding the different types of rewards is the first step. UK businesses typically have three main options:

1. **Cashback:** This is the most straightforward reward. You earn a percentage of your spending back as a statement credit or a direct payment to your bank account. A common rate is 1% on eligible spending. So, for every £100 you spend, you get £1 back.

2. **Points:** Many business cards offer points for every pound you spend. For example, the Capital on Tap Business Credit Card typically offers 1 point for every £1 spent. These points can then be redeemed for various rewards, such as gift cards, statement credits, or even converted to other loyalty schemes. The value of a point varies depending on how you redeem it.

3. **Air Miles (e.g., Avios):** Some cards, particularly those from providers like American Express, are linked to airline loyalty programmes. You earn Avios points for your business spending, which can be redeemed for flights, upgrades, and other travel-related perks. These are often favoured by directors and employees who travel frequently for business.

The core principle is simple: the more you spend on the card, the more rewards you accumulate. These rewards are funded by the interchange fees that merchants pay to process card transactions and, in some cases, by the annual fees cardholders pay.

The Break-Even Point: Is an Annual Fee Worth It?

Many premium rewards cards come with an annual fee, which can range from under £100 to over £600. The key question is whether your business spending is high enough to generate rewards that exceed this fee. Let's do the maths.

Imagine you're choosing between two cards:

- **Card A:** No annual fee, offering 0.5% cashback.

- **Card B:** A £99 annual fee, offering 1% cashback.

To find the break-even point, we need to calculate how much you’d need to spend for the extra 0.5% cashback from Card B to cover its £99 fee.

• **Difference in reward rate:** 1% - 0.5% = 0.5%
• **Calculation:** £99 (fee) / 0.005 (0.5% as a decimal) = £19,800.

Points vs. Cashback: Decoding the True Value

While cashback is simple, points can be more complex. The value of a point isn't fixed; it depends entirely on the redemption option you choose. Let's look at a typical model, like Capital on Tap's, where you might earn 1 point per £1 spent.

- **Redeeming for Cashback:** 10,000 points might be redeemable for a £100 statement credit. In this case, each point is worth 1p. This is equivalent to a 1% cashback card.

- **Redeeming for Gift Cards:** The same 10,000 points could get you a £100 gift card for a specific retailer. Again, the value is 1p per point.

- **Redeeming for Avios:** You might be able to convert 10,000 points into 10,000 Avios. The value of an Avios point can fluctuate, but it's often estimated to be around 1p. However, if you are savvy and use them for a business-class flight upgrade, you could extract a value closer to 1.5p or 2p per point. This makes the return significantly higher, but it requires more effort and flexibility.

The choice between points and cashback depends on your preferences. If you value simplicity and a guaranteed return, cashback is king. If you enjoy optimising points and travelling for business, a points card could deliver superior value. Cards like the Capital on Tap Business Credit Card offer this flexibility, often with no annual fee, which can be a good starting point. New customers using the promo code SETTINGUP may also get a bonus.

The Biggest Pitfall: How Interest Wipes Out Rewards

This is the most critical point for any business to understand. The value of rewards is quickly destroyed if you don't pay your credit card balance in full every month.

Business credit card interest rates (APRs) are often high, sometimes ranging from 20% to 30% or more. Let's run a scenario:

Suppose you spend £5,000 in a month on a 1% cashback card. You've earned £50 in rewards. However, you only make the minimum payment and carry the remaining balance over.

Let's assume a representative APR of 29.9% on the remaining £4,950 balance. The interest charge for that month alone would be approximately:

**(£4,950 * 29.9%) / 12 months = £123.26**

The Behavioural Factor: Are You Spending More to Earn Points?

The 'gamification' of spending is a real psychological pull. Earning points can feel rewarding, which might subtly encourage you to spend more than you otherwise would. This is a significant risk for businesses.

Ask yourself these questions:

- **Is this purchase essential for my business?** Never buy something you don't need just to hit a spending threshold or earn a bonus.

- **Could I get this cheaper elsewhere?** Sometimes, merchants who accept premium cards (like Amex) might have slightly higher prices to cover the higher transaction fees. Always compare prices.

- **Am I choosing a supplier based on card acceptance?** Don't compromise on the quality or price of a service just because a supplier accepts your preferred rewards card.

Tax and Accounting: How HMRC Views Your Rewards

For UK businesses, the treatment of credit card rewards is relatively straightforward but must be handled correctly.

According to HMRC guidance, rewards like cashback or points are generally not considered taxable income, provided they are earned on legitimate business expenses. This is because they are treated as a reduction in the cost of your business purchases.

For example, if you spend £1,000 on stock and receive £10 (1%) cashback, your actual cost is £990. When you do your bookkeeping, you should record the expense at the net amount of £990.

**What about VAT?** You can only reclaim VAT on the full price of the goods or services *before* the cashback is applied. So, in the example above, if the £1,000 expense included £166.67 of VAT, you would still reclaim the full £166.67. The cashback is applied to the net amount.

It's good practice to keep a clear record. If you receive rewards as a lump sum statement credit, you or your accountant may need to allocate this across the relevant expense categories. Simplicity can be a major advantage here; for instance, a business bank account like Tide's, which offers cashback on card spending, can make tracking these transactions simpler. New customers might find their REFER200 promo code attractive.

Who Benefits Most from a Business Rewards Card?

While any business can use a rewards card, some are positioned to get significantly more value. These businesses typically have high levels of card-based spending on legitimate expenses.

**High-Spend Businesses:** Digital marketing agencies spending heavily on online ads, construction companies buying materials from trade counters, or manufacturing firms purchasing raw materials. If your monthly card spend is consistently in the tens of thousands, the rewards can become substantial.

**E-commerce and Online Sellers:** Businesses that use cards to pay for stock, shipping, and online platform fees (like Amazon or eBay) can quickly accumulate points.

**Tradespeople and Contractors:** Electricians, plumbers, and builders who buy materials and tools from wholesalers can channel all that spending onto a rewards card. The key is to find a card with high acceptance rates, as some suppliers may not take American Express.

**Consultants and Agencies:** Those who pay for software subscriptions, travel, and client entertainment can also benefit. For these businesses, the value of travel-related perks like airport lounge access can be as important as the points themselves.