A Beginner’s Guide to Business Bank Accounts in the UK
What is a business bank account?
Business current accounts have similar features to personal current accounts: you can pay money in, transfer money, use a debit card and manage your account online. Certain business accounts have extra features, such as invoicing, payment cards for other employees and integration with accounting software.
The main difference between a business bank account and personal bank account is who the money belongs to. This has important tax implications.
If you’re a sole trader, you and your business are the same – your business income is your income, so you’ll have to pay income tax on it. But if you run a limited company, your company is legally separate from you. This means your company's income is taxed differently and separately from the money you ‘receive’ or pay yourself as income or dividends from the business.
As limited liability partnerships (LLPs) are also separate legal entities, LLP business bank accounts should be separate from their partners’ finances.
There are business current accounts available for sole traders, limited companies, LLPs, business partnerships, charities and other organisations, though not all providers offer accounts to all types of businesses.
How does a business bank account work?
Business bank accounts work in a similar way to personal current accounts. You can deposit and withdraw money, receive incoming payments, use a debit card to pay for goods online or in person, and set up standing orders and direct debits.
You can manage a business bank account online, over the phone, via an app or in a branch, depending on the provider and the type of account you choose.
How to open a business bank account
To open a business bank account, you can usually apply in one of the following ways:
- in branch
- online via the provider’s website
- through a provider’s mobile app
Who can open a business bank account?
If you’re a sole trader or run a limited company, you can normally open a business bank account. Partnerships, including limited partnerships and limited liability partnerships, may also be eligible.
Charities, clubs and societies can open certain types of business bank accounts – it’s worth checking with providers if you want to open an account for one of these.
Some business bank accounts have strict eligibility criteria, such as minimum or maximum turnover or trading history. Providers may also have restrictions on which business structures and industries can open an account, so it’s a good idea to look through the terms of an account to make sure you’re eligible before applying.
What is required to open a business bank account?
To open a business account, you’ll need to show proof of your identity and give the name and UK-based address of your business. Providers may also need other information, such as your industry, how many employees you have and your estimated annual turnover.
How long does it take to open a business bank account?
It can take anything from just a few minutes to a few weeks to open a business current account. It depends on the provider you apply to, and how long it takes to complete its checks.
Types of business bank accounts
There is a range of different business bank accounts available, including current accounts and savings accounts. What’s more, you can choose to bank online or instead opt for a bank with a high street presence.
Business current account
Business current accounts operate in a similar way to personal current accounts. Generally, you can withdraw or deposit cash and make payments using a debit card, whether you’re shopping online or in store. You can also accept incoming payments, transfer money to others, and set up standing orders or direct debits.
Business savings account
A business savings account lets you put aside spare cash and store it for a later date, while earning interest on it. There are different types of business savings account:
- Easy access: There are few or no restrictions on when you can deposit or withdraw money.
- Notice: You must give the bank notice before you want to withdraw money (you choose a notice period when you open the account).
- Fixed rate: You ‘lock away’ your money for a certain amount of time and get a fixed interest rate for the whole term.
Which savings account you get depends on your specific circumstances. If you’re unsure, it’s worth talking to a financial adviser or asking your bank for more information.
» MORE: Business savings accounts guide
Online business accounts
You can get a business bank account which can be managed largely or solely online. This includes accounts from challenger banks or digital-only providers, as well as traditional banks which have diversified their offering.
If you like to manage your money on the go, via an app or through internet banking, this could be an option for you. If you prefer to bank in a branch, an online business account may not suit you.
Free business bank accounts
Some business bank accounts are described as ‘free’. This usually means that you don’t have to pay a monthly fee, but you may have to pay for other services and per transaction instead. Or, it could mean that there is an introductory offer where you don’t pay for everyday services for a period of time.
You may be able to choose between a free or paid version of a business bank account, each with different features or a separate pricing structure. You could compare these to see which is more suitable for your business needs.
You should check the terms of your business account to find out more about ‘free’ business banking and what fees a provider may charge.
» COMPARE: Explore free business accounts
A merchant account manages incoming transactions made by debit or credit card. This can be set up with a payment processing service.
With a merchant account, transactions are processed and any fees for using a card terminal or other processing system are deducted before you receive the money.
If you sell goods and take payments online, by phone or in person using debit or credit cards, you may need a merchant account.
Do I need a business bank account?
Whether you are a sole trader, freelancer, a contractor, running a limited company or in a partnership, you’ll need to keep your finances organised. One way to make this easier is to open a separate bank account for your business.
With a business account, you’ll keep work transactions separate from your personal money so it may be easier to do your accounting and tax returns. And by managing a business account, you will build a business credit score for your business, which will be useful in future if you need to take out a business loan or get a company credit card.
Pros of using a business bank account
- You can build a credit score for your business.
- You will be able to keep your business finances separate from your personal finances.
- It looks more professional – some clients may want to send money to a business account rather than a personal account.
Cons of using a business bank account
- It is another bank account to keep track of.
- There may be charges for actions that may be free with a personal account.
Business account vs. personal account
How might a business account differ from a personal current account? We look at the similarities and differences below, and consider the pros and cons of each.
Similarities between business and personal accounts
Business accounts and personal accounts have similar features, so you can use a business bank account as you would use a personal current account.
This means you can use it for your day-to-day banking needs, such as making transfers, setting up direct debits, and paying for goods in store or online.
Differences between business and personal accounts
The difference between the two is that a business account is set up for your business – it shouldn’t be used for personal transactions. Likewise, you should not use your personal account for business-related activities, unless you are a sole trader.
Mixing up the two means that it is more difficult to keep your business and personal finances separate, something you are required to do if you run a limited company. It can also be a good idea to keep these separate if you’re a sole trader, as it can help you organise your transactions when it comes to filling in your self-assessment tax return.
Pros of using a personal account for business
- Ease: For sole traders, all your money is in one place.
- Familiarity: If you use the same account for both sole trader and personal transactions, you’re already used to how it works.
Cons of using a personal account for business
- It’s often against the bank’s terms and conditions to use a personal account for business – your provider could close your account if you do.
- Limited companies cannot do this – your business is legally a separate entity to you, so you need a business account.
Traditional business account vs. online business account
Would you prefer to open a business bank account at a traditional bank with branches on high streets around the UK? Or would you be happy with an online-only account?
There are advantages and disadvantages to each option. For example, some online business account providers offer useful extras, such as tools to help you categorise your transactions, keep track of staff expenses and put money aside for your tax bill. However, if you want to deposit cash or cheques, or negotiate an overdraft, you might find it easier at a high street bank.
With so many options available, it’s important to take the time to decide what you need, use online research tools like our comparison service, and weigh up the pros and cons of the different accounts.
Similarities between online and traditional business accounts
- You can use them for your day-to-day banking, including transfers, standing orders, direct debits and card payments.
- Traditional high street banks may also have internet and mobile banking, so you can manage your account online too.
Differences between online and traditional business accounts
- Traditional high street banks have branches where you can go in to manage your account or ask for help, while online accounts offer support digitally or over the phone instead.
- Online business bank accounts may take less time to set up than traditional bank accounts, though this is not guaranteed – it depends on your provider and individual circumstances.