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
Why open a business bank account as a sole trader?
There are four good reasons to open a business account as a sole trader:
- 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.
Founded in 2015, Tide was one of the very first tech startups to offer digital-only business current accounts in the UK.
- An excellent free plan
- 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
- 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
Starling Bank’s sole trader account is the only business bank account on this list that does not have per-transaction charges. It’s a Which?-recommended provider and has won banking awards in 2018, 2019, and 2020.
- It’s a fully-fledged bank, but unlike most business bank accounts it’s free
- There’s round the clock customer support by phone or via the chat feature in the app
- You can ring-fence money for your tax bill or other overheads using the “Goals” feature. When you put money towards a goal, it gets deducted from your main balance, so you always see your balance net of any outstanding expenses
- It’s digital-only, so you can’t go to a branch for a face-to-face conversation
- Many of their more interesting features, like multi-currency accounts, invoicing, bill uploads and VAT submissions are in the Business Toolkit, which costs £7 a month. This is on the expensive side for business banking
Coconut is an account and accounting software rolled into one.
- 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
- 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
Originally an app that let you exchange currency at the cheapest rates possible, TransferWise has now created a Borderless Business Account.
- 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
- UK transfers cost 60p per transaction
- You can’t deposit cash or cheques
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.
- 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
- 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
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.
Last updated - 11th February, 2021