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If you’re a freelancer, contractor or sole trader, 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.
Do I need a business bank account as a sole trader?
No, it’s not a legal requirement to have a business bank account as a sole trader. HM Revenue and Customs (HMRC) treats 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. Having a business account may help you to:
- track your cash
- simplify your tax return admin
- access business finance
- look more professional
Track your cash
A separate business bank account may make it easier to keep an eye on your cash flow. 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 return admin
Filing your self-assessment tax return may be easier if all your business transactions go through one account, without being mixed in with your personal bills and shopping. Keeping your business finances in one place can help ensure you’ve kept track of all your allowable business expenses, for example.
Access business finance
You might want to fund your growth through a business loan. Having a business account can help you create and build up a credit record and credit score for your business, which lenders will look at when assessing your eligibility for a loan.
Look more professional
A proper business bank account could help show that you take your work seriously and are diligent about your finances. Some customers won’t want to make payments into a personal account.
Do I need a business bank account or can I use a personal account?
If you are a sole trader, it is possible to use your personal account for your business finances.
This may be a viable option while starting out. For example, if you are a sole trader who does not make many transactions and who wants to avoid the potential hassle of opening another account.
However, it’s worth remembering that in some cases, using a personal current account for business purposes may be against the terms and conditions of your account. If you’re found to be in breach of the T&Cs, your bank could close your account.
What’s more, business accounts can offer specific services designed to help business owners. These can include access to dedicated business managers or integration with accounting software to help you manage your business’s accounts. Personal current accounts are unlikely to include these provisions.
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 mostly free, but some business accounts charge monthly or for some transactions – or both. And while some personal accounts pay interest, business current accounts may not.
Although there may be a cost for a sole trader business bank account, it can 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 may help if you later consider applying 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 and events.
To discover more advantages of using a dedicated account for your business finances, take a look at our guide on the benefits of a business bank account.
Can I use a personal bank account for my limited company?
No, you cannot use your personal current account to manage the finances of your limited company. A limited company is a separate legal entity from you, so must have its own business account and its own finances.
How to choose a sole trader business bank account
There are many factors to evaluate when considering which sole trader bank account is right for your business. Here are some points to consider:
It’s important to think long term when choosing your account. Providers may offer introductory deals, freebies or discounts to persuade small business owners to apply for their account. However, it is worth thinking about whether the account will suit your needs in the longer term.
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.
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 online or via a mobile banking app?
Will you need to deposit cash or cheques? You’ll need to check whether providers offer this, and where you can pay in. 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.
However, several banks will allow you to deposit cheques via a photo on their mobile banking apps, saving you a trip to the post office or bank.
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?
Not all sole trader accounts offer an overdraft, business 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
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 10 minutes. In contrast, some high street banks take several weeks.
Image source: Getty Images
Using a business bank account is a smart way to keep your finances organised and separate from your personal money. Whether you’re self-employed, in a business partnership or run a limited company, find out why you may need a business account, and how to choose the right one to suit you.
If you run a small business, you need to keep on top of your finances. You may want to open a business bank account. We cover the steps you need to follow to open an account for your business.
If you have income from self-employment, you may have to set up as a sole trader. Sole traders have responsibilities including keeping accurate records and managing their accounts. You may also need to register for self-assessment. Find out more here.