In the UK now over five million are self-employed, doing some freelancing, contracting or are a part of the gig economy. If you are thinking about joining this number then, among the other things, you will be faced with the question of whether to open a business bank account or not. There are definite advantages to doing so in some circumstances and could affect the success of your business. Read our guide to find out if a business bank account is right for your small business and how to choose the correct one.
Do I legally Need One?
That depends on your business structure. While it is a legal requirement for private limited countries to do so, it is not the case for a sole trader. However, there are many reasons you may also want to open one if you are a sole trader.
If you don’t open a business account, it means you will have all your small business income and expenditure mixed in with your personal finances. This makes it more difficult to submit your taxes. Especially if you are, for example a hairdresser, where you have a constant stream of small payments and expenses coming in and out of the account; all mixed in a statement with your personal spending. Sifting through your account to then separate the two will be incredibly time consuming and may lead to inaccuracies that could get you in trouble with the tax man if you miss payments received. You may also miss genuine expenses that you could use to reduce your tax bill.
When you invoice your customers, it may well be clear that you are expecting the money paid to a personal rather than a business account and that means you won’t look so professional.
Not everyone gets audited, but it is legal requirement to take and keep records for six years. In the event you did get audited, you would then have to submit your personal finances to HMRC’s scrutiny.
Personal Account Terms and Conditions
If you are registered as a sole trader, whilst it’s not illegal to use the same account, your bank may penalise you for making significant business expenses on your personal account. If you only have a small number of deposits going into the account, then your bank probably won’t notice. However, if you are trying to deposit lots of cheques from businesses, or you have a food truck and are trying to deposit cash on a regular basis, your bank will notice and may close your personal account or insist you open a business one.
Presumably, you are committed to growing your business and at some point, in the future, you may need a business loan to help with that expansion. You can’t build up credit history if your business’ revenue is going through your personal account. You won’t be eligible to take advantage of any business products. If this is the case it makes sense to start building that credit history asap.
All bank charges on a business account are tax deductible.
With a business bank you will pay fees, probably monthly ones and at the very least to make deposits. For someone who is genuinely just testing the water on opening a business this can be costly. In addition, you have to make sure that money is transferred at the right time to pay direct debits from their personal accounts in order to avoid overdraft charges. Something that would be easier to manage if all expenses are going through the same account.
Choosing a Business Account
It goes without saying that you need to find an account that meets your specific needs. For some businesses, it might be important to get access to a line of credit, while others have requirements around features like Mobile Cheque Deposit or Deposit Reconciliation. It’s also important to know about any fees and other charges.
And it is not necessarily the right choice to go to the bank where you personally bank as they are unlikely to offer preferential treatment and they may not have the services you need.
Fintechs vs High Street Banks
If you are a small business, just starting out, and cost is an issue, you may want to start by looking at the new fintechs – Starling and Tide – first. They are cheaper, easier and faster to setup, compared to high street banks and they offer integration with online accounting software.
The main drawback to a fintech may be the ability to pay in cheques and deposit lots of cash. Not all of them offer this service. If you are running a business where this is necessary, you may be better off with a high street bank. Especially if you have a float and are paying in cash every day, you need to find a bank with a branch near you because you may need to pay to use the post office.
Check on what introductory free offers are available with the high street banks – for example, first year free charges and if you also have the ability to sync with accountancy software like FreeAgent, QuickBooks or Xero.
The kind of fees you need to check pricing on include:
- Monthly fee
- Cash deposit/withdrawal fee
- Transfer fee
- Cheques in/out fee
What if You Have Bad Credit?
It is not necessarily the case that if you have bad credit you will be ineligible for a business account.
For example, Cashplus Business account guarantees approval if you have the correct ID.
Opening an Account
If you are a sole trader, you may just ID and proof of address, but if you are a limited company, you are likely to need to provide the following:
- Proof of identity
- Proof of address
- Business name
- Full business address
- Contact details
- Estimated annual turnover
- Companies House registration number (for limited companies and partnerships)
- Business plan (in some cases)
- Personal financial situation (in some cases)
With a high street bank, you will need to go into the bank, and it might take a few days to set it up.
Paying for Tax
You can learn everything you need to know about paying your taxes in this article. However, as a general rule, you will need to set aside 30% of your earnings for tax and it would be best to set up a separate account to save. Some fintechs will allow you to quickly set up another account and even notify how much you should be saving.
It is different, and more complex, if you are the director of a limited company. You will probably be paying corporation tax rather than income tax. And it will depend on if you are using an umbrella company or directly contracting.