Guide to self-employed business bank accounts

Are you using a personal account for your self-employed income? Using a sole trader business account instead separates your finances and simplifies your accounting. Here’s our guide for freelancers, contractors and sole traders.

Suzanne Worthington Published on 27 May 2020. Last updated on 17 June 2021.
Guide to self-employed business bank accounts

If you’re a freelancer, contractor or self-employed you might have had confusing and conflicting advice about how best to manage your finances.

Is it a legal requirement that you use a business bank account for your business income and expenses? Should you have separate accounts for personal and work finances? What are the benefits of having a separate bank account for your business? And is a business bank account the same as a sole trader account? How do you choose the best bank account for your self-employed business?

In this article, we answer these questions to help you manage your business finances with confidence.

What is a sole trader?

A sole trader is the exclusive owner of their business, entitled to keep all profits after tax - but liable for all debts and losses accrued by the company too. If you’re a sole trader, it’s your responsibility to file an annual self-assessment tax return for HMRC. This is as opposed to a company which is created as a separate legal entity that may be owned by multiple people and exists independently of its owners.

If you’re freelance, contracting or running your own business and haven’t set up as a limited company, you’re probably classified as one of the 3.5 million sole traders, the self-employed people who form 59% of businesses in the UK’s private sector.

‘Sole’ trader doesn’t necessarily mean you’re working alone: sole traders can and do hire staff.

» MORE: Self-employed vs. sole trader: what’s the difference?

Do I need a business bank account if I’m self-employed?

No, it's not a legal requirement. As a sole trader, HMRC treat your business and personal incomes as one and the same for the purposes of working out the income tax you’ll pay. That’s why legally it’s fine if all your income goes into your personal account.

However, there are many benefits of opening a separate bank account for your sole trader business for example:

  • Simplify your cashflow
    A separate business bank account will make it easier to keep an eye on your cashflow. Without personal transactions clogging up your transactions list, you’ll be able to see quickly and easily when customers paid you, when you’ve paid your suppliers, and how much money your business has in the bank.
  • Simplify your tax returns
    Doing your tax return is much easier if all your business transactions go through one account, without being mixed in with your personal bills and shopping.
  • Lay foundations for growing your business
    When you’re looking to expand, having a business bank account lays the groundwork for your business to do just that. You might be considering expanding into a limited company as part of your growth plans. When you do this you will require a business bank account. Or, you might want to fund your growth through a loan, you’ll need a business bank account to qualify for many business loans.
  • Enhance your professional image
    A proper business bank account helps show that you take your work seriously and are diligent about your finances. Some customers won’t want to, or won’t be allowed to, make payments into a personal account.

» MORE: Do I need a business bank account?

What is a sole trader bank account?

There are two types of business bank account for small businesses: sole trader accounts and limited company accounts. Sole trader bank accounts are offered by high street banks, as well as by many challenger banks.

Sole trader bank accounts equip you with banking facilities for your business, including online banking and a payment card. Some also include handy tools like invoicing or sub-accounts where you can put aside money for your tax bill, or credit services like a credit card, overdraft and access to business loans.

Can I use a personal account for my sole trader business?

Depending on the scope and scale of your sole trader business, some banks won’t allow you to use your personal bank account for business banking.

If you want to use a personal bank account for your business banking, check the account’s terms and conditions - it’s common for banks to say you must not use a personal account for ‘business purposes’. If the bank notices a pattern in your personal account of transactions that look like business banking, such as lots of PayPal payments or cash deposits, they might take these as a sign that you’re using the account for business purposes. They might ask you to open a separate business account - or even close your account for breaching the terms.

What is the difference between a sole trader account and a personal account?

Like a personal current account, all the money in a sole trader business account is legally yours and you’ll have access to online banking and a payment card.

The first difference you might notice is the cost. Personal accounts are often free, but business accounts charge monthly or for some transactions - or both. And while some personal accounts pay interest - even if the rate is a very low percentage right now - most business current accounts pay no interest.

Although there’s often a cost for a sole trader bank account, many include useful features that you wouldn’t get on a personal account, such as an invoicing tool, receipt uploader for your expenses, or integration with accounting software. A business account can also give you the opportunity to apply for a business loan, including a coronavirus Recovery Loan, if they’re offered by your provider.

Some banks offer even more support to sole traders, such as free business advice, networking, and access to training, events and funding.

To discover more benefits of using a dedicated account for your business finances, take a look at our guide to how to get the most out of a business bank account.

How to choose a sole trader business bank account

There are many factors to evaluate when considering which sole trader account is right for your business. Here are some points to consider:

Introductory offers

It’s important to think long term when choosing your account. Many lenders offer attractive introductory deals, freebies or discounts to persuade small business owners to apply for their account. However, will the account be worth the cost longer term?

Fees

Which account features are most useful to your business? When you know what you need, you won’t end up paying for services you won’t use. You can compare accounts for fees and thresholds: for example, if you rely on lots of small transactions from customers, you might want to opt for an account with a high number of free monthly transactions.

Accessibility

Deciding how you’ll want to access your account makes choosing a provider easier. Do you want face-to-face service in a branch or are you happy with 24-hour access via a smart money management app? Will you need to deposit cash? You’ll need to check providers offer this. If you opt for a provider with branches, you might want to factor in the proximity of the nearest branch, as well as whether it is easily accessible and has parking nearby. If you opt for an online-only business account, check whether you’ll be able to access your account on different devices and how to reconfigure your account when you change your mobile.

Reviews

Customer reviews are generally far more honest and to-the-point than the marketing materials of banks advertising their business bank accounts. Take a look at independent review websites to find out what existing customers have to say. Is the bank renowned for excellent customer service? Are they notoriously slow processing applications? As well as review websites, you could look at customers’ comments on the social media accounts of providers you’re interested in - what are they posting about and how does the provider respond?

Credit services

Not all sole trader accounts offer an overdraft, credit card or access to business loans. If these features would be useful for your business, look out for them when you’re comparing accounts.

Ease of opening an account

Many online lenders have worked hard to make opening a sole trader bank account simple and speedy. If you need a business account quickly, check what providers say about how long it takes to open an account. Some online providers promise to approve your application and get your account open in just ten minutes. In contrast, some high street banks take several weeks.

» MORE: How to open a business bank account

Switching to a sole trader account

The Current Account Switch Service is a fast and easy way to move to a different provider - but it’s possible only if the details on your old and new accounts match. So if you’re currently using a personal account for your sole trader banking, you won’t be able to use the switch service to move to a sole trader business account.

Instead, you’ll need to make the switch yourself. When your new sole trader account is open, you’ll need to:

  • cancel any regular payments on the old account and set them up on the new account
  • update your invoice template with the new details
  • inform customers and any other third parties about your new details

Comparing sole trader business bank accounts

If you decide to open a sole trader bank account, look carefully at the options to find the best bank account for self-employed people in your position. You can use our comparison service, which includes a guide to how to choose a business account, to help narrow down what you need and then find deals to suit your business.

» COMPARE: Business bank accounts

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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