Do I need a business bank account?

by Paul Sandquest 26 January 2022

Whether or not you are legally obliged to have a business bank account will depend on the structure of your business. As a limited company, registered with Companies House, you will need to have a business account as your business is a separate entity that is not linked to your personal finances. If you operate as a sole trader, a separate account is not mandatory. Likewise, if you have a side hustle and work as part of the gig economy, you are not required to open a business account. If you’re setting up a new business you can learn about the advantages and disadvantages of different legal structures in: Sole Trader vs Limited Company.

Despite there being no regulatory requirement to have a business account if you are a sole trader or gig worker, it is highly recommended. In the same way that using a virtual office address for your business helps to keep your personal and business live separate, a business bank account enables you to ensure there is no confusion between your business and personal finances.

HMRC requires you to record your business transactions separately to your personal transactions. This does not necessarily mean you must have a business bank account, but that is recommended as the most efficient method.

What is a business bank account?

A business bank account operates in the same way as a personal bank account but is used only for business transactions rather than personal finances. It can be opened in the name of the business and enables payments to be made and received in the name of your business.

Benefits of opening a business bank account

Often sole traders and freelancers are keen to get their business moving and try to do so with as little fuss and ‘unnecessary’ admin as possible. Upon discovering that they don’t need a separate business bank account, they tick it off as another item dealt with.
Others look into the possibility of a business bank account and are put off by transaction fees for using their card. This is a short-sighted view.
Even as a sole trader, there are several benefits to opening a separate business account:

Credibility – Rarely is business credibility more important than when first starting out. With no reputation or reviews to back up your claims of professionalism, you are already up against it. If you choose to use your personal bank account as your business account too, you will need to clearly display that on invoices. When clients come to make payments, their own bank will need to verify that the name on the invoice matches the sort code and account number. If you have tried to dupe the system by using your personal bank account but your business name, you will be found out. Clients need to see that your outfit is professional, not just read it on your website.
Business Finance- A business bank account will also allow you to apply for business loans and other credit streams. There are also some benefits and discounted services associated with business bank accounts that can help you manage your business finances – and therefore your personal finances too – more efficiently.
Your Bank – The terms and conditions of your personal account may well not allow you to use it for business purposes. If you do so, and if your bank finds out, they may restrict or close down your account immediately. Trying to run your business with no access to funds can be very tricky to say the least. A business bank account allows you to start building a credit rating for your business.
Accounting – Mixing your personal and business finances can cause problems when it comes to bookkeeping and accounting. Trying to accurately calculate your income and expenditure when it is mixed in among your shopping transactions and other personal spending creates unnecessary confusion. Submitting incorrect information to HMRC, even unintentionally, can lead to financial penalties, so maintaining a clear distinction between the two is vital. Keeping the two distinct from one another will also make it easier to identify any taxable benefits. It will also keep your books in good order in the event that they need to be audited or you decide to instruct an accountant to go through them.
Decision Making – The business decisions you make will determine the success or failure of your business. These include any payments and investments. You can only be confident in your financial decisions if you know they are based on an accurate picture of your company finances. A separate business account allows you to see clearly the financial state that your business is in.

What to look for in a business account

Most high street and online banks offer business accounts. Identifying the best business bank account is very similar to choosing the right personal one. Indeed, for the most part, you will manage your business bank account in the same way that you manage your personal finances so you needn’t worry about it. As a small business or sole trader your finances are unlikely to be exceedingly complex. Certainly in the early days, you should have no problem with a simple business bank account. There are several key factors to look out for when researching which business account is right for you:

Services – The services included as part of the account should suit your business. These are likely to include online banking, a mobile app, bill payment options and business debit cards.
Fees – Different banks and accounts have different fees. Look for monthly fees as well as rates for overdrafts and card transactions. Naturally, those business accounts with most features tend to charge the highest fees. Don’t rule an account out simply because of its fees. If the features suit your business, it may be the right account. You shouldn’t save on banking fees to the detriment of your overall operation. But when examining the features of each account, consider whether you actually need them and whether you will use them. Remember, you can always upgrade your account to benefit from additional services as your business grows. Monthly fees are typically between £5 – £15 per month. Most banks charge a fee for each business transaction so you may be charged any time you deposit cash, issue a cheque, set up a direct debit or standing orders, or make a bank transfer. There are a limited number of business accounts that offer no fees as standard eg Tide, Starling and Monzo. There are also some that offer no fees for a limited period once you have opened your account. Make sure you budget for what the long term charges will be. And don’t be swayed from opening the most appropriate account by a short term offer. Changing accounts down the line is not recommended as it will almost certainly prove a logistical and administrative nightmare.
Integration – If you are already using accounting software, make sure your business account will integrate with it. These days, it’s more than likely that it does, but better to check now than find you need to change your account later.
Cash Flow – Some business accounts have limits on the number of withdrawals that can be made each month. Consider the number of withdrawals you currently make, but also whether that is likely to increase in the relatively near future. Extra withdrawals are likely to incur fees so the account you choose must match the cash flow of your business.
Location – If you deal in cash and expect to visit a physical branch of your bank on a regular basis, you will need to make sure there is one local to you.
FCA Approved – All financial service providers must be authorised by the Financial Conduct Authority (FCA). The institution’s authorisation status should be displayed on their website and any official literature. If you have any doubts about whether your account provider is FCA approved, visit the official FCA website.
Reviews – A quick check on Google or Trustpilot will let you see what other users are saying.

What Do I Need to Open a Business Bank Account?

To open a business bank account in the UK, you will need to:

Have an annual turnover of less than £6.5 million
Have a straightforward, clearly defined ownership structure
Be based and operate in the UK

As a sole trader, you will usually need to provide photo ID (usually passport or driving licence) and proof of your current address (usually a bank statement or utility bill).

If you are opening a business bank account as a limited company, you will typically need to provide those same documents along with details of your company’s registration at Companies House, and VAT registration details if applicable.

Should I leave money in my business bank account?

You should aim to always have enough in your business account to pay for your monthly business expenses as well as any small, unexpected costs.

Is a business bank account right for you?

Banking is never exciting, but making money is the reason that you are in business. From a professional and personal point of view, it makes sense to open a business bank account whether you are legally obliged to or not.

When you first start to look into self-employment as an option, it’s easy to find advice on what you should and shouldn’t be doing. From a wellbeing perspective, you are advised to inform your friends and family that you will have less time for socialising – but you are also advised to make sure you draw a clear distinction between your business and personal life. You are advised to avoid the temptation to see every waking moment as time that you should be working, and instead make sure you have time to yourself.

That same distinction should be applied to your finances. Allowing them to merge into one creates risks for both. Trying to manage a single account from two differing perspectives is likely to lead to confusion and errors. Errors you can ill afford in either sphere. Opening a separate business account will help to delineate the two and provide you with clarity.

Using your personal bank account as your business account also intrinsically links your business to your home address. While you may be working from home, you might not want your name, home address and personal bank details shared with clients and laid bare on invoices.

A business bank account allows you to create that distance and distinction between your business activities and home life.