Sole Trader Bank Accounts Explained
If you’re looking to start a brand-new business as a sole trader, setting up a sole trader bank account could be the most straightforward method of banking available to you.
In the past, it wasn’t uncommon for a sole trader to double up their personal bank account as their business bank account—but adopting this approach can create more problems than it solves.
A solid alternative is the sole trader bank account, which simplifies the process of filing your annual return and helps you stay on top of your business’s cash flow. Could it be right for you?
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 are a sole trader, it is your responsibility to file an annual self-assessment for HMRC. This is as opposed to a company which is created as a separately legal entity that may be owned by multiple people and exists independently of its owners.
If you are self-employed, run your own business and haven’t incorporated a limited company, you’re probably classified as one of the UK’s 3.5 million sole trader businesses, who constitute 59% of the businesses within the British private sector.
The term sole trader is sometimes misconstrued to include only those businesses consisting of single employees, but sole traders can and do hire staff.
Do I need a separate bank account as a sole trader?
If you are a sole trader, there is no legal obligation to open a business bank account. You may well decide to conduct your business transactions exclusively from your personal bank account.
You might reason that this makes the most sense, seeing as HMRC will be treating your business and personal incomes as one and the same for the purposes of tax.
However, sole traders may find it more convenient in the long run to open a sole trader business bank account to track their business finances.
What is a sole trader bank account?
A sole trader bank account is a type of business bank account. Similar to a personal current account, sole trader bank accounts are offered by the majority of high street banks, as well as by more specialist challenger banks.
Most sole trader bank accounts equip you with all the banking facilities your business needs, including online and telephone banking, a business cheque book, debit and credit cards and an overdraft.
One of the key differences between a sole trader business bank account and a personal bank account is that business bank accounts (including sole trader bank accounts) generally pay interest rates that are lower than those of personal bank accounts—and the fees are often higher.
You will probably have to pay a monthly account fee for your sole trader bank account, generally between £5–£15, although some banks will waive this for as long as 18 months for new customers. Be aware that transactions such as cashing in cheques or paying in cash over the counter may incur further fees.
Sole trader bank accounts generally involve different perks to personal bank accounts. Whilst the latter may offer vouchers or cashback offers, the perks of sole trader bank accounts revolve more around access to a business bank manager, free business advice and discounts on business products and services, such as online accounting software.
Depending on the scope and scale of your sole trader business, some banks may not allow you to use your personal bank account for business banking. If you do wish to use your personal bank account for business banking then you’ll need to check its terms and conditions. If you break these terms, the bank may request you stop using the account in this way—or even close it.
If the bank notices a pattern in your personal bank account of high-level transactions and many cheque and over-the-counter cash deposits, they may take these as a sign that you are using the account for business purposes.
The benefits of a sole trader bank account
Aside from the costs of transactions and the monthly fees, the benefits of opening a sole trader bank account are numerous and varied.
Filing your annual return is easier
HMRC treat the business and personal incomes of sole traders as one and the same for tax purposes. That being said, you can still offset expenses such as travel, salaries and equipment against the income.
If you operate your business out of your personal bank account, you need to check it thoroughly to identify any and all transactions related to your business.
A sole trader business bank account, on the other hand, keeps your business expenses in one place, which can streamline the process of filing your tax return.
Keeping on top of cash flow
Operating your business out of your personal bank account can confuse matters when you’re trying to acquire an overview of the health of your business's cash flow.
A sole trader bank account makes it far easier to acquire an understanding of your business’s cash flow at a glance.
It is more straightforward to see how much cash the business actually has, as well as whether suppliers have been paid and if there are any late payments and invoices that need chasing up.
Boosting perceptions of professionalism
Most sole traders have to deal with other businesses on a regular basis. If this is true for you then a business bank account can increase the air of professionalism surrounding your brand.
Invoice payments to a business bank account can come across as more secure and discreet than those made to a personal bank account.
How to choose a sole trader bank account
It can be tempting to sign up to the first business bank that offers an enticing discount. Most banks look to win new business by offering up to 18 months of free banking, which can seem perfect if your business is a start-up and cash flow is tight.
However, oftentimes it’s actually better to see past such offers and opt for a business bank account from which you will receive the best value in the long run. This involves weighing up the costs of transactions and considering the business benefits of any given offer.
Customer reviews are generally far more honest and to-the-point than are the marketing materials of banks advertising their business bank accounts, so endeavour to practice due diligence when conducting your research.
Is the bank renowned for superlative customer service? Are they notoriously slow when it comes to processing applications? Are their reviews consistently poor across multiple comparison sites?
Business accounts often entail hefty banking costs, especially if they have been preceded by a period of free use. Different accounts charge different fees for depositing cash, paying in cheques and leveraging the bank’s overdraft facilities.
Does one account offer altogether lower fees on the business transactions you’re going to be using most frequently?
If you’re going to need to make regular trips to the bank for over-the-counter services, you may wish to factor in the proximity of a bank’s nearest branch, as well as whether it is easily accessible and has nearby parking facilities.
Larger branches generally have a dedicated business bank manager, so it’s worth setting up a meeting with them. You may also wish to check out what’s on offer in terms of online tools and advice. These may prove invaluable, especially if you’re still in the process of setting up your sole trader business.
If you opt for a challenger bank, it’s worth knowing that these tend to have a predominantly online presence. However, if this suits your business then it could be well worth considering, as they often have lower fees.
Perks and features
What does your sole trader business especially need from a bank account? Are you likely to require overdraft facilities? Do you need to evaluate transactions limits before committing to a particular offer?
You may also need to consider how easily reconcilable the account would be with your business accounting software, as well as whether the bank offers an app for on-the-go banking.
Is a sole trader bank account right for me?
A sole trader bank account should always be treated as entirely separate from a personal bank account.
You need to be financially savvy with your approach, but if you have weighed the costs and features of a sole trader business bank account and secured a competitive deal, you’ll be well on your way to receiving the best banking service and facilities for a sole trader.
Comparison resources can help you find the sole trader bank account that’s right for your business. Concise, impartial comparisons could be what you need to help get your newfound business off the ground—and flourish.
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