Why do I need a business bank account?

Whether you’re legally obliged to have a business bank account depends on your business structure, but having a business bank account can be a good idea for most businesses, even freelancers and sole traders.

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When you’re considering whether to open a dedicated business account, the first thing is to understand if you’re legally obliged to do so. This depends on whether you’re operating as a sole trader or setting up a limited company.

If you’re not sure which business structure to pick, check out our article on the difference between a sole trader and a limited company.

Do I need a business account as a sole trader?

As a sole trader in the UK, you don’t have to have a business bank account, but you might choose to.

Legally, you can use your personal bank account for both business and non-business transactions or you can set up a second personal bank account to use for your business.

However, there are several reasons that setting up a business account may still be a good idea. These are five reasons why you might consider opening one.

1. Your bank’s terms and conditions

It’s likely that somewhere in the small print of your personal bank account documents it says that your account should be for personal use only.

If your bank realises that you’re using the account for your business – particularly if there’s a lot of money passing through or you’re handling a lot of cash and cheques – they may force you to close your account and tell you to open a business account.

2. To keep things clear for HMRC

When you complete your tax return, you need to tell HMRC how much money your business has made. You can subtract certain allowable expenses (travel costs and office costs, for example) to calculate your taxable profit.

If your personal costs are mixed up with your business costs because you use one bank account for both, it can be difficult to make these calculations accurately.

3. Simplify your admin

Not only does having a business bank account help with reporting to HMRC, it also makes it much simpler for you to manage your business budget and forecasts.

Sorting out which expenses are personal and which are for your business can take time, so having a separate bank account can help you manage your business finance more efficiently.

4. Build your credit rating

Having an account in your business name can help you if you need to apply for a business loan in the future. It helps to build up a credit history for your business, which many banks will look for when considering if you’re eligible for business finance.

5. To look professional

Having a dedicated bank account can make your business appear more professional, as clients can make payments to an account held in your business name rather than your own name. Some clients don’t like making payments into personal accounts.

I have a limited company: do I need a business bank account?

If you’ve set up a limited company in the UK you need to have a business bank account as your business is legally a separate entity. You shouldn’t be using a personal account for any of your business expenses.

Business bank account vs. personal bank account

Like a personal bank account, a business bank account can offer cash and cheque handling, a debit card, and an overdraft. As with your personal account, you’ll be able to set up direct debits and standing orders. Having a business account also paves the way for your business to borrow money, get a business credit card, and take card payments from customers.

The main difference between a personal and business bank account is that you’ll usually pay fees for a business account. Most business bank accounts charge a monthly fee (starting at around £5 to £8) and then additional fees for certain transactions like depositing cheques. However, many banks offer an initial fee-free period of one to two years when you first open the account.

Can I use my personal bank account for my small business?

As we’ve mentioned above, if your small business is a limited company you’ll need to have a business account. If not, there are a few factors you might want to consider:

• do you have employees, or plan to in the near future? If you’re a sole trader managing your own payroll accounting, this can become very complicated without a separate account
• do you need to apply for a loan? While not essential, having a business account might help if you want to apply for a loan, such as the government’s Recovery Loan Scheme

How to open a business account

When choosing your bank, you’ll first want to think about whether you want an account that has physical branches or if you’re happy with an online-only bank account.

Once you’ve done your research, opening a business account online can take between one and four weeks while the bank carries out a range of checks. You’ll just need a few personal details and business documents to get started.

Check out our article on the the best business bank accounts for a comparison of accounts offered by some of the major banks, including information about the fee-free periods.

Can I get a sole trader business bank account?

Some banks offer specific business bank accounts for sole traders and start-ups, giving you the benefit of separating your finances but often with a lower monthly fee that’s tailored to the services you need.

When do I need a business bank account?

If you don’t yet have one, you may need to open a business bank account as your company grows. For example:

• if you’re planning to incorporate your business as a limited company
• if your business is processing a lot of transactions
• if your business income and expenses are getting complicated and you’re concerned about accurately completing your tax return
• if you want to take out a business loan or get a business credit card
• if you want to take card payments from your customers

This article does not constitute legal or financial advice. Please speak to your bank or seek professional help if you’re not sure whether you need a business bank account.

What’s your experience of business banking? Tell us in the comments.