How to Change From a Sole Trader to a Limited Company Bank Account

Whether you need a business bank account comes down to if you have a limited company or are a sole trader. Read on to learn when you need a business bank account, how to set one up and how to change from a sole trader to a limited company bank account.

Jeff Salway Published on 22 February 2021. Last updated on 23 February 2021.
How to Change From a Sole Trader to a Limited Company Bank Account

When it comes to setting up a business or going self-employed, working out where your money’s going to go and how you will be paid is a vital box to tick.

On the face of it, a business bank account is much the same as a personal bank account. Indeed, many self-employed people simply use their personal account for their business banking too.

But there are also some important differences to be aware of, and a few things you need to know when you’re sorting your business banking.

Why set up a business bank account?

There are situations when you are legally required to operate a business bank account for your business but even if you’re a sole trader or freelancer there can be practical advantages to using a specific account for your business finances.

Perhaps the most obvious is the ease of management and monitoring that a ring-fenced business account used only for your business-related incomings and outgoings can offer, especially when it comes to working out your expenses and tax returns.

It’s worth noting too that a standalone business account can give you the credit history you need if you intend to apply for some form of business credit at a later point.

How do business bank accounts differ from personal bank accounts?

The basics are the same as a personal account. A normal business bank account will allow you to run an overdraft, use a debit card, deposit cash and cheques, set up direct debits and standing orders and to receive payments. But business accounts also have features specific to business needs.

There are a couple of areas where a business account differs from a personal banking arrangement. Firstly, there is likely to be a charge, whereas plenty of personal accounts remain free as long as you don’t go overdrawn.

Business bank accounts will also have features including debit cards for whoever in the company is permitted to use them, and the ability to make or receive payments in foreign currencies. Some business account packages include access to dedicated account managers and/or 24/7 helplines that can offer guidance with the account.

An increasingly important factor for many firms is the compatibility of their accounting software (such as FreeAgent, Xero, QuickBooks and PayStream) with the bank’s own systems. Check with the provider you’re moving to that you’ll be able to integrate the account with your software, as this can make things much quicker and more efficient. Some may instead offer their own accounting software, probably at a small charge.

Do I need to set up a business bank account?

There are legal reasons why you might have to do this, most obviously when you’re switching from sole trader or freelancer to limited company status.

If you set up as a limited company you must use a business bank account specifically for that entity. All accounts should be held in the company name, as the money belongs to the company and not the director or owner.

That’s not the case if you’re a sole trader, where HMRC will treat your personal and business income as one.

There are potentially costly consequences to continuing to use a personal account for a limited company.

That’s because the salary and/or dividends that you take out of a limited company are liable to tax, while other money taken from it will likely be considered a director loan, making it subject to certain conditions and tax rules. If you get any of this wrong there could be some stiff tax penalties.

Take a look at the terms and conditions on your personal account too. Some account providers specify in their small print that the account should only be used for personal use, with the possibility that they will close it down if they find it’s being used for significant business transactions.

» MORE: Do I Need a Business Bank Account?

How much are business account fees?

While business bank accounts typically come with a monthly fee, most providers will offer an introductory fee-free period of a year or two.

Fees tend to hover at around £5 to £10 a month, with extra charges for functions such as overdrafts and foreign currency transfers added on top. Some accounts will include those functions in monthly charges of up to £40 a month.

It’s worth comparing what you get from different accounts and identifying those most suitable for your needs.

Take time with the research part, so that you don’t have to repeat the whole process because you have gone for an account that doesn’t work for you.

How can I set up a bank account for my limited company?

The process should be quick and easy – provided the necessary documents are to hand and they are the most recent. These will include:

  • proof of ID for all named signatories.
  • proof of your company address.
  • your Companies House registration number.
  • your estimated annual turnover.

Some providers will also want to check your credit history, so make sure that it’s clean and up-to-date before starting the process.

How long will it take to set up an account?

Opening a new account can take a matter of minutes, unless the provider wants to carry out more detailed checks.

If you’re switching accounts, have fewer than 50 employees and a turnover of less than £6.5m, you’ll be able to use the Current Account Switch Service, where the bank you’re moving to will carry out the necessary changes within seven working days, free of charge. Larger businesses can ask their new bank to do all the work, with seven working days usually a realistic timeframe.

» MORE: How to Open a Business Bank Account

Image Source: Getty Images

About the author:

Jeff is a freelance journalist who writes across finance & business. He was the personal finance editor at The Scotsman & Scotland on Sunday & a member of the Financial Services Consumer Panel. Read more

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