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

If this is the year you’re going to make your dream of being a small business owner come true, you’ll need to know exactly what your banking options are.

Nic Redfern Published on 27 May 2020. Last updated on 20 January 2021.
Do I need a business bank account if I’m self-employed?

As a newly self-employed person operating as a sole trader, in a partnership or as a limited company, you will have heard lots of confusing and conflicting pieces of information about how best to manage your finances.

Is it a legal requirement that you use a business bank account for incomings and outgoings from your business? Should you have separate accounts for personal and company finances?

These are the questions we answer in this article to give you a clear path to managing your company finances with confidence.

A limited company is legally required to use a business bank account. However, the rules for sole traders and partnerships are different. Legally speaking the money that belongs to you if you are a sole trader or in a partnership and the money that belongs to your business is the same. This means that you are not obliged by law to use a business bank account for the revenue generated by your company.

However, more and more banks and other lenders are requiring sole traders who are existing customers to use business banking facilities, or risk the closure of their accounts.

What are the benefits of having a separate bank account for your business? And does it have to be a business bank account or a sole trader account?

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

No, it's not a legal requirement, however, there are many benefits of opening a separate bank account for your business dealings, including simplifying tax declarations and maintaining clarity over your profit and loss account and cash flow.

Many sole traders find that the features available with business bank accounts also help facilitate the smooth running of their company. For example:

  1. For tax purposes, HMRC requires that your business transactions are separated from your personal transactions when you file a tax return. Taking out a business bank account will make this significantly easier
  2. A separate business bank account will allow you to keep an eye on your cash flow. Without personal transactions muddying the waters, you can determine clearly when clients and customers paid you last, you’ll be able to work out how much money the business currently has and when you’ve paid your suppliers
  3. 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
  4. A business bank account gives your company a professional image. It avoids the situation where customers are confused by making payments to an account registered in your personal name

What is the difference between a business bank account and a personal bank account?

Like a personal current account a business account will give you access to online and telephone banking, debit and credit cards and an overdraft facility.

One of the defining features of a business account is that it gives your business the opportunity to apply for a business loan.

On the downside, however, whereas personal accounts are often free, business bank accounts may have an associated monthly fee. However, it is often possible to get a free initial period; some lenders will even waive fees for up to 18 months which can be useful for businesses that are just starting out, when cash flow is tight.

A business bank account may also charge you for transactions including paying in cash and paying suppliers, however your account should clearly list the monthly tariffs on your account.

Business bank accounts include useful features like the ability to integrate tools such as accounting software, making it simpler to manage your books. Some lenders will categorise your expenses for you and allow you to log receipts immediately on their app. You’ll also have the ability to make more transactions with a business account, as personal accounts can be limited by lenders. As mentioned, you’ll be able to apply for a business loan, which could take your business to the next level.

With certain accounts you’ll qualify for free business advice and access to the bank manager, which can be a valuable tool for new business owners.

Furthermore, with a business account you can process transactions in different currencies, which can be useful for global companies with clients located across the globe.

We’ve created a guide on how to get the most out of a business bank account, explore it to discover more benefits to switching to 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. Your business is unique, and so are sole trader bank accounts. We’ve created a guide to decode sole trader business bank accounts but let’s take a look at some of the essential points here.

Introductory offers – worth the cost?

It’s important to think long term when choosing your account. Many lenders offer seductive introductory offers to lure in small business owners to sign up to their account. However, when you start paying monthly fees, will the introductory offer be worth its long-term cost?

Usage fees

Ask yourself which features are most useful to your business, this way you won’t end up paying for services you don’t need and won’t use. Moreover, compare prospective accounts for usage fees and thresholds; for instance, if you rely on many small transactions from customers, you will want to select an account with a high monthly transaction threshold.

Joining perks

Some lenders will offer significant perks to get you to join. This goes back to the earlier point of thinking long term. While a certain perk may be extremely attractive, in the long run it may not be the best bank account for you. Instead, compare accounts for important features like overdrafts, the amount of advice and guidance offered – if you’re a brand new business this might be the number one benefit for you – access to credit and availability of useful tools.

Ease of opening account

Many online lenders have worked hard to make opening a sole trader bank account an incredibly simple and streamlined affair. It’s worth comparing the best bank accounts for the self-employed for ease of opening the account and getting started. The quicker the process, the sooner you can get on with the million and one other crucial tasks you need to tackle.

Find out exactly how to open a business bank account in our guide.

Comparing business bank accounts

As you now know, having a separate bank account for your personal and business banking needs is practical and sensible but not essential for sole traders or self-employed.

Your task now is to decide on the best route for you and, if you choose to open a separate business bank account or sole trader bank account, then carefully look through the options to find the best bank account for self-employed people in your position. Use our guidance throughout this article, sift through the deals and choose the account that will power your business on its journey onwards and upwards.

About the author:

Finance Director at NerdWallet UK and business adviser to SME's Nic is spokesperson for small and growing businesses with a strong understanding of the financial needs of business Read more

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