Do I need a business bank account?

Using a business bank account is a smart way to keep your finances organised and separate from your personal money. We look at your options and obligations, and how to choose an account.

Suzanne Worthington Published on 20 February 2018. Last updated on 26 April 2021.
Do I need a business bank account?

You’re setting up your own business? Smart move! The UK is consistently called out as one of the best countries to live if you’re self-employed.

Whether your business will be your full-time job, part-time hustle on the side of employment or a start-up planning on world domination, you’ll need to keep your finances organised.

One way to make this easier is to open a separate bank account for your business. But do you need a business bank account? It depends on how you’re operating your business…

Do you need a business account if you’re a sole trader or freelance?

If you're operating as a sole trader (that's HMRC's term ‒ you might call yourself freelance, self-employed or a contractor), it's up to you whether you use a business account.

One big advantage of having a business account is that it keeps your personal transactions separate from your work payments. You might use a spreadsheet or accounting software to do your books but it’s much easier to see your business income and expenses when they’re in a separate account. Otherwise, you’ll have to hunt for business transactions sprinkled in between your payments for household bills, grocery shopping, random coffees and more.

Another advantage of having a separate account is that you’ll appear more professional. This might not seem important right now, but if you later hire an accountant or if HMRC ever asks to inspect your accounts, you’ll be glad you have a separate business account.

What are your options? As a sole trader, you can opt for a professional business account. Or if you only expect to get a few payments a year, you could open another current account alongside your existing personal account and have your customers pay you into the new account. If you decide to do that, check the small print carefully ‒ the T&Cs for many personal accounts state that you can’t use them ‘for business purposes’.

Do you need a business account for a limited company?

If you're operating as a limited company, even if you’re the only employee, your company should have a business account. This is because the company is legally separate from you and you must keep your company’s money separate from your personal money.

All your company income should go into the business account, and you can then pay your expenses and yourself (and your staff, if you have any) out of that account. Keeping company income and expenses separate from your personal money makes it much easier to tally up your company’s accounts and do your tax returns.

There’s a bonus side-effect to running a business account: when you manage your account well, you’ll build a good credit score. This will come in handy in future if you need to take out a loan or get a credit card for your small business.

» MORE: Building your business credit rating

Do you need a business account if you run an organisation with other people?

If your organisation is set up as a charity, social enterprise, partnership, unincorporated association or LLC (limited liability company), then you need a separate account in the name of the company.

If you have the organisation’s money coming into your own bank account, HMRC will treat this money as your personal income and you’d be liable to pay tax on it.

Can you use the same bank for personal and business accounts?

You can hold personal and business accounts with the same provider but there are pros and cons of doing this.

Here are some common reasons why people prefer using the same provider:

  • Manage your money more easily
    You can choose a bank where you’ll need only one login for online banking, or you’ll have only one branch to visit.
  • Get a discount
    Your personal account provider might offer a discount or incentive to open a business account with them.
  • Pay yourself faster and fee-free
    ‘Internal transfers’ ‒ moving money between accounts with the same bank ‒ are usually free and instantaneous.

But there are two big reasons why you might not want to have your personal and business accounts with the same provider:

  • Get a better deal elsewhere
    A different provider might offer a bigger incentive, lower fees, better services or some handy extras such as an invoicing tool, company expense cards or free foreign payments.
  • Protect more of your money with the FSCS
    The Financial Services Compensation Scheme (FSCS) protects up to £85,000 of the ‘eligible’ money you hold in a bank. If you’re a sole trader, the money in your business and personal accounts held at the same bank adds together to count towards the £85,000 FSCS limit ‒ you wouldn’t be able to make separate claims. But if your business is a limited company, you can claim separately for your business and personal money.

What do you need to open a business account?

What you need to do to open a business bank account will vary depending on the account provider.

Many business bank accounts have strict eligibility criteria. You might need to make an appointment at a branch, and you might be asked to show evidence of your turnover or trading history, such as your annual accounts or previous tax return.

In contrast, with some account providers you can apply online and give only basic information.

To open a business account with any provider, you’ll always need to show proof of your identity and give the name and UK-based address of your business.

» MORE: What documents you need to open a business account in the UK

How to choose the best business account

A good place to start when you’re looking for a business account is to decide what features and services you need. Then compare accounts which offer these. You can use our comparison page to browse offers from different providers.

Not sure what features you need? The compare page also has a handy guide to how to choose a business bank account.

As well as comparing the costs of the accounts, you might want to learn more about the providers. For example, some people like to check the ethics and values of their bank, and their ratings for customer service on review sites.

» COMPARE: Business bank accounts

Image Source: Getty Images

About the author:

Sooze is a specialist financial services writer, working ‘on the inside’ to help businesses communicate clearly for over 10 years. Her work has been awarded Fairer Finance’s Clear & Simple Mark. Read more

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