Sole traders aren’t legally required to own a business bank account, but there are several advantages to having separate business and personal finances. In this blog, we look at why you might want to open one.

Do I need a business bank account?

If you’re a sole trader, then it’s not compulsory for you to have a separate business bank account. It is, however, advisable – especially if the following criteria apply:

• You’re planning to incorporate your business and become a limited company
• Your business is processing a lot of transactions
• Your business’s income and expenses are getting complicated, making it trickier for you to accurately fill in your tax return
• You want to take out a business loan or get a credit card for your business
• You want to take card payments from your customers

If you’re a limited company, then your business will be classed as a separate legal entity to you and therefore you are legally obliged to hold a business bank account.

Why get a business bank account

It’s advised that you set up a business bank account, even if your new business is just a part-time side project. While you can legally use one bank account, or open a second personal account, there are things to consider before you do so…

A business bank account makes things clearer for HM Revenue and Customs

During your Self-Assessed tax return, you’ll have to report your business income, outgoings and expenses. Having these numbers mixed in with your personal finances can make it difficult to ensure you’re calculating your taxable profits properly, especially if you’re trying to claim back allowable expenses. It’s therefore advisable to open a business bank account and keep your tax returns simpler.

Your bank’s terms and conditions may not allow it

If you’re set on using your personal bank account for now, then make sure you’ve check the terms and conditions before doing so. There may be a line in the small print that prevents you from using your account for anything other than personal use. If they find you’re using your personal account for business (for example, there’s a lot of money passing through or you’re processing a lot of cash and cheques) then they could take action – even going so far as to close your account.

It’ll instil more confidence in customers

It looks a lot more professional for you to ask customers to pay into an account with your business name, and some customers don’t like paying directly into non-business accounts.

Think of it from their perspective – if you’re being asked for an upfront payment into someone’s personal account, are you likely to feel more hesitant than if they’re asking for the money to be sent to a separate, business-named account?

It’ll be easier to claim tax relief

Only true businesses can deduct business expenses, and HM Revenue and Customs may consider your venture to be a “hobby business” or not-for-profit if you use a personal bank account. If you’re not using a legitimate business bank account, then it may be harder for you to prove you’re running a legitimate business and claim expenses back.

The quick guide to business bank accounts

If you’re looking to open a business bank account, then consider the following:

• Most high street banks offer business banking, but be sure to shop around before signing straight up with your current personal bank.
• Take note of charges and fees, and remember that the introductory rates will eventually expire!
• Checkout reviews and testimonials to see what their support is like and whether they offer online chat, email or telephone support.
• Find out whether they’ll pay interest on balances or not.
• See if they offer online business banking, as real-time statements will make reconciliation easier – especially when you’re having to do this quarterly as part of Making Tax Digital.

With online accounting software like KashFlow, you can connect your online bank accounts for automatically updates that make sure your books are always up-to-date and that you don’t get caught out processing payment.

Our accounting software also allows you match actual bank statements with your KashFlow accounts and create rules so that transactions are automatically matched to invoices, purchases and transactions.

Learn more about how accounting software can help with banking, or see more of KashFlow’s features in free trial (with no credit card required).