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Either way, a business bank account is an effective way of separating your business income from your personal finances.

Here we’ll outline why your start-up needs a dedicated business account, as well as the benefits of having one even if you aren’t legally obliged to do so.

Business bank accounts for sole traders

Sole traders and freelancers operating as sole traders are not legally obliged to have a separate business bank account. It is permitted to use a personal bank account to handle business and personal transactions. Alternatively, you may wish to have two personal bank accounts – one for your self-employed income and one for your disposable income.

Nevertheless, it can still prove beneficial to use a business bank account when operating as a sole trader for the following reasons:

  • Your bank states your personal account should not be for business use
    Be sure to review the small print of your personal bank account. Most banks state that using a personal current account for businesses is forbidden.
     
  • Simplify your self-assessment tax returns
    To avoid the headache of separating your business and personal finances when preparing and submitting self-assessment tax returns, a separate business bank account can make it easier to determine expenses and your taxable profit.
     
  • Develop a credit score and history for your business
    If you plan to apply for external finance for your business in the future, a business bank account is a good way of building a credit rating and history for the company. Banks will typically require a credit rating to lend to businesses.

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

In many ways, personal and business bank accounts are practically identical. They both permit cash and cheque handling, as well as overdrafts (on application) and debit cards for ATM withdrawals. Having a business bank account also helps when it comes to setting up a business credit card and allows you to take card payments from customers more easily. You can also set up standing orders and direct debits for business bank accounts, just like personal accounts.

The key differentiator is the costs incurred of using a business bank account. Most banks will charge a monthly fee, as well as further charges for administrative tasks such as banking cheques.

Limited companies must use a business bank account

If you decide to operate your new business as a limited company, you must open a business bank account. The limited company is a separate legal entity and therefore owners must ring-fence all income and expenses in a business account solely for the limited company.

There are business bank accounts for limited companies that don’t charge monthly fees and contain a range of digital money management tools that may help you run your business in a more organised fashion.

Reasons for opening a business bank account

If you decide not to operate with a business bank account from day one, below are some of the tell-tale signs that you should consider upgrading from a personal bank account to a business bank account for your growing start-up:

  1. You are processing an increasing number of business transactions.
  2. You plan to accept card payments from clients.
  3. It’s becoming increasingly hard to keep business expenses and income separate in your personal account.
  4. You have decided to incorporate your business and become a limited company.
  5. Your short-to-medium-term goal is to secure business finance.

How to open a business bank account

First and foremost, you must decide whether you require a business bank account with a bank that has high-street branches. If you aren’t a business that regularly cashes cheques and such like, you may be happy with an exclusively digital business bank account.

Applying for a business bank account can take several weeks. Your chosen bank will undertake several identity and security checks to verify and validate your new account. You will probably be asked to provide business documents, including business address and proof of incorporation (if you are a company).

TaxAssist Accountants - Your one stop shop for a wide range of supporting services

We are delighted to be able to help you where possible with a range of services throughout the journey of your business life. We know that running your own business can be challenging at times and so TaxAssist Accountants is here to support you every step of the way. We have a range of providers who can offer you these services so make sure you contact us today and we will put you in touch with the partners we believe can provide you with a first class service. Contact us today on 01282 864 228 or complete our online enquiry form and we will call you back.

Date published 27 May 2021 | Last updated 10 Jun 2021

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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