How to choose the best sole trader bank account

There’s no rule that says you must open a separate business bank account when you start working as a sole trader. In theory, you could use your personal bank account to receive client payments, pay your suppliers, and handle other business-related transactions.

But, just because you can do something, it doesn’t mean you should.

There are several reasons why opening a business bank account and keeping your business and personal finances separate is a good idea.

In this post, we’ll look at these reasons in detail. We’ll also discuss:

  • How the business account-opening process works
  • The three things you should think about before choosing a sole trader account
  • Five excellent accounts for sole traders on the market today

Read on.

Why open a business bank account as a sole trader?

There are four good reasons to open a business account as a sole trader:

  • Simplicity
  • Useful features
  • To keep your bank on-side
  • To look more professional

Keeping things simple

One of your key responsibilities as a sole trader is to keep a “complete, accurate, and readable” record of your incomings and outgoings. And, well, using the same account for both business and personal transactions makes this harder than it has to be.

If all your transactions are lumped together, you’ll have to go through your bank statements line by line to work out which ones are relevant for record-keeping purposes and which ones aren’t.

More to the point, you’ll add an extra step when it’s time to work out how much tax you owe. This is because your personal expenses aren’t allowable tax deductions. So you’ll need to subtract them from your totals before you do your calculations.

In comparison, having a separate account for your business makes things much more straightforward. There are no personal transactions to take into account when doing your taxes. And, because all the transactions will be business-related, you’ll have a clearer picture of your business’ financial health at any point in time.

Getting more out of your account

Business accounts often have business-related features that personal accounts lack. These include invoicing, tax calculators, analytics, and even cashback and discounts on other business-related products and services.

This is all stuff that can save you a lot of time and money. Plus it’s useful to boot.

You could be breaching your bank’s terms and conditions

While there’s no law that says you can’t use a personal account for business, many banks’ terms and conditions specifically prohibit it.

The upshot is simple. If your bank finds out you’ve been breaching their terms, they may close your account. And this would take you back to square one.

Having a business bank account looks more professional

If you trade under a business name, having a business bank account means clients can pay into an account that’s named after your business. They can also make credit card payments and write cheques (yeah, remember those) in your business’ name.

This looks more professional than an account that’s named after you.

What’s more, it strengthens your image as a legitimate business your clients can trust. And trust is crucial, especially if you’re new and selling products or services online. 81% of consumers are concerned when they’re shopping on a website they’re not familiar with.

How do you open a business bank account?

These days, most banks let you start a business account application online. That said, while the process is not too dissimilar to opening a personal account, it tends to be a bit more involved.

Some banks may require you to do a phone or in-branch interview to complete your application. In addition, alongside your personal information, you’ll also need to provide some information about your business.

Different banks ask for different things. That said, you can broadly expect to be asked for the following:

  • A document to prove your identity, such as your passport or driving licence
  • A document to prove your residence, such as your latest Council Tax bill or a recent utility bill, phone bill, or bank statement
  • Business details — typically your business’ name and official address
  • Your estimated annual turnover, that is how much revenue you expect to generate in a year

Your bank may also be interested to know how many payments you expect to make or receive in an average month and where those payments are coming from. This helps them understand what’s typical for your business so they can flag up anything that’s unusual and, so, potentially suspicious.

If you choose a bank that lets you complete the process entirely online, be prepared for some additional checks. Depending on the bank, they may ask you to take a selfie, write down a unique code and take a selfie with it, or shoot a quick video where you repeat a predetermined phrase. This is so they can confirm your identity.

Choosing a business bank account: 3 key things to consider

With all high street banks in the UK plus several digital-only tech startups offering business accounts, you’re spoilt for choice.

So how do you decide which account to pick?

Well, it all boils down to what your business’ most pressing needs are.

Here are three things to consider to help you decide which account would suit you best.

1. How do you typically pay or get paid?

Do you do a lot of cash-based or cheque-based transactions? Or do you primarily pay and get paid by card or bank transfer?

If it’s the latter, a digital-only account would work well for you. But if your business is cash-heavy, a high street bank with a branch reasonably close by will probably be a better fit, because it’ll be more convenient for you to make deposits.

It’s also worth thinking about your customers’ geographical location. Will they be predominantly local, or do you plan to do business internationally?

High street banks don’t usually have the best exchange rates. So if you’re planning to reach customers abroad, a digital-only bank with a multi-currency option could save you a lot of money in the long run.

2. How do you like to bank?

Are you comfortable doing most of your banking from an app on your phone? Or do you like having the option of speaking to someone face to face?

If the thought of a bank with no branches makes you nervous, a digital-only bank won’t be a good fit. You’re probably best off going with a high street bank. The trade-off is that high street banks typically charge more fees, precisely because having branches — and hiring staff to operate them — creates more overhead.

If you do decide to go digital-only, it’s worth noting that not all apps are equal. Some are more user friendly than others. And this can have a huge impact on your banking experience.

With this in mind, it’s worth shortlisting a few contenders and trying out their apps if you can.

For what it’s worth, App Store and Google Play Store reviews may also give you an idea of what using the apps is like. Are they rated highly? Or do users complain that they’re clunky, glitchy, or hard to use?

3. What more do you want out of your bank?

With so many possibilities, most banks now offer valuable perks and add-ons in an effort to entice you away from their competitors. These can include:

  • Cashback on business purchases
  • Money off business software and professional services
  • Business coaching and other specialist support
  • Free materials such as legal document templates
  • Helpful features such as invoicing and reports

Have a think about what your business would benefit most from, and shop around for the account that has the bundle that’s most appealing to you.

The 5 best bank accounts for sole traders

We’ve talked about why you should open a business account, how to do it, and what to consider when you’re choosing one.

But what are some of the best accounts for sole traders on the market today?

While ‘best’ is very subjective, we’ve put together a list of five accounts that stand out for their quality and value.

Here goes.

Tide

Founded in 2015, Tide was one of the very first tech startups to offer digital-only business current accounts in the UK.

The pros:

  • An excellent free plan
  • Bytestart readers get £40 cash back just for opening an account (you have to fund your account with at least £1 to receive this excellent bonus). Simply click here to qualify.
  • Bytestart readers get 1 year of free transfers.
  • Open up to five different business accounts — great if you want to keep your sales from different products or services separate or want to have the option of branching out without having to open multiple accounts
  • You can grant your accountant or other staff members read-only access
  • Get perks such as money off business workshops and co-working space memberships

The cons:

  • It’s digital-only, which might make you feel uncomfortable if you like to bank the old school way
  • Transfers in and out of the account cost 20p a pop after the first year.

Coconut

Coconut is an account and accounting software rolled into one.

The pros:

  • It does everything a current account does, and everything accounting software does too: invoicing, receipt storage, expense categorisation, and even VAT management
  • It works out how much tax you owe automatically on an ongoing basis, so there are no surprises
  • You can give your accountant access

The cons:

  • Deposits and withdrawals cost £1 a pop, not good if your business is primarily cash-based
  • You can only send up to 3 invoices a month on the free plan

TransferWise

Originally an app that let you exchange currency at the cheapest rates possible, TransferWise has now created a Borderless Business Account.

The pros:

  • No monthly fees
  • Hold money in over 50 different currencies
  • Get US, UK, EU, Australian, and New Zealand bank details, so you can get paid like a local and avoid foreign transaction charges

The cons:

  • UK transfers cost 60p per transaction
  • You can’t deposit cash or cheques

NatWest

NatWest is the only high street bank on this list. It has an award-winning app. But it also 3,600 branches across the UK, which means you can pop in for a face-to-face chat if you prefer.

The pros:

  • Get FreeAgent accounting software free forever, a saving of £19 plus VAT a month
  • Free learning tools, mentoring, and networking events
  • Round the clock customer support by phone or via the app, plus face-to-face banking during branch opening hours

The cons:

  • As with other banks, a whole host of charges apply once your 18- month free banking period ends
  • Applying is a bit more involved because NatWest is a traditional bank, not a tech startup

Wrapping up

Mixing business with pleasure isn’t usually a good idea, at least when it comes to your finances. But while that means having to choose and apply for a business account, the extra effort is well worth it.

Keeping your business and personal finances separate means less admin, easier accounting, plus a few great perks thrown in for good measure.

Smiles all round.

Don’t forget, Bytestart readers can get £40 just for opening a business account with Tide. Click here to find out more about this special offer.

Last updated: 16th June, 2021

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