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Do I need a business bank account?

So you’ve made the decision to become self-employed and are considering how best to organise your finances. One question looms above all: do I need a business bank account?

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In some scenarios, there is no legal obligation to open a dedicated business bank account, while in others, it’s a legal must. Equally, whether or not you can use a personal current account for business is an individual decision regarding how you manage your finances and the complexities involved.

There are many factors that will inform your decision. Here’s what you need to know to make up your mind.

As a sole trader, you may be among the many self-employed people who put their business transactions, including payments, invoices and expenses, through their personal bank account. But did you know that some banks have rules against this?

From a legal perspective it’s absolutely fine to operate as a sole trader without opening a business bank account

Banks will often encourage sole traders to open a separate business bank account for these transactions, particularly if your account sees a high volume of business payments. Banks like to make money from business customers and are unlikely to turn a blind eye for long.

However, while you will need to check the details with your bank, from a legal perspective it’s absolutely fine to operate as a sole trader without opening a business bank account.

If you’re running a limited company, partnership or trust, however, the decision is taken out of your hands. Once you have incorporated your business with Companies House, you are legally obliged to establish a dedicated business bank account.

Professional image

The larger and more high profile your operation becomes, even if you remain a sole trader, the more beneficial it will be to make the switch away from your personal current account. Sending invoices to clients with your personal bank details on can start to feel unprofessional after a certain point.

You might also find that larger clients are more comfortable dealing with suppliers with dedicated business bank accounts. There simply comes a point where the answer to the question ‘do I need a business bank account?’ starts to change.

From this perspective, some burgeoning sole traders and small business owners consider setting up a business bank account to convey an impression of size, authority and permanence. Ensuring you appear as well-established and professional as possible at the very beginning of your self-employment journey can really help you to succeed.

Even on a very practical level, a separate business bank account will bring value. As you grow, you’re likely to be processing a growing number of invoices – both sending and receiving – each month. Chances are it will become harder to keep track of everything if it’s mixed up with your personal banking and the last thing you want to do is risk an accounting error that could damage relationships with your clients and potentially harm your reputation.

HMRC and business bank accounts

There’s a lot to be said for professional image and equally for simplifying your own small business accounts process by separating out your business finances. But simplifying the taxation process is often the biggest reason to make the change.

Segregating your business finances from your personal finances is a massive help on tax return day

Even if you’re operating a very small business with a low income, segregating your business finances from your personal finances is a massive help on tax return day. Calculating your business income and any relevant expenses is much easier when it’s all filtered through the same account. Equally this can be of benefit to your business operations as well by providing you with a clear and accessible view of revenue and expenditure.

If you have an accountant, you’ll need to provide them with a separate breakdown of your business costs, payments and expenses, so they can complete your tax return. Most accountants prefer you to have a business bank account to make this process a bit more straightforward and reduce any chance of error.

Is a business bank account right for you?

Legally speaking, if you’re a sole trader it’s up to you whether or not you open a business bank account, but know that many people do and it’s generally seen as advisable if you have plans to grow your business operations.

However, if your business remains small, with a modest number of invoices and few expenses, it may be worth sticking with your personal account – at least for the moment.

If you do make the move, keep in mind that most banks will charge businesses fees on their current accounts after an initial ‘grace period’ of a year – and many will even do so right from the beginning. These fees are often related to monthly activity, while other charges may be added as a percentage of certain transactions.

Finally, don’t forget that a business bank account will provide you with borrowing capacity that may extend beyond that of your personal bank allowance. Overdrafts and business loans are available with different rates and conditions to personal borrowing options, so if you’re likely to need access to some extra funds in the near future, start thinking about making the switch sooner rather than later.

For most sole traders who have grown their operations into a full-time income source, there will come a point when you have to open a business bank account. It is up to you to decide if and when this moment has arrived.

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