Do I Need a Business Bank Account If I’m Self-Employed? When you start out as self-employed, every penny matters. So opening a separate business bank account may feel like a cost you can avoid. That being said, many choose to open up a business bank account, regardless of any cost. Here’s why.
First of all, it is worth noting that even though there is no legal obligation to open a separate business bank account when you are self-employed, it is recommended by HMRC.
So why then do self-employed people go through the hassle of opening an account and the cost of operating it?
There are a number of reasons they choose to do it. Here are some of those reasons as well as a few reasons why I recommend it.
1 Easier Record-Keeping
Why make your bookkeeping harder than it needs to be?
Opening up a business bank account when you’re self-employed makes identifying all your transactions easier, without the clutter of all your business spending.
It’s just good practice for anyone that runs a business to have a separate bank account.
Some accounts even integrate with bookkeeping softwares like Quickbooks, helping you to manage your finances and estimate your tax in real time.
2 Manage Your Business Cashflow
The reasons behind the peaks and troughs in cash are unique to each business.
If your personal bank transactions intermingle with business transactions it will be harder to understand what is going on with your business and where you may be wasting money.
3. Stop You Dipping Into Tax Money
It can be tempting to dip into what looks like a healthy bank account. But when you are self-employed everything you are paid is untaxed.
That means you need to set some aside for your tax bills in January and July.
4. It’s Professional
If you act like a business, your clients will treat you like a business.
Asking your clients to pay into a dedicated bank account will help you look credible.
5. Pay the Right Amount of Tax
When there are personal and business transactions in the same bank account, you risk expenses being incorrectly allocated as drawings meaning you end up paying too much personal tax.
Conversely, personal expenses could be allocated as business expenses meaning you incorrectly receive tax relief.
HMRC will take a dim view of this in the event of an investigation especially as their guidance states you should keep separate business and personal bank accounts.
6 Frozen Bank Accounts
HMRC now have the power to raid or freeze your bank account if they are suspicious of you in any way or if you owe tax.
Imagine if they froze your personal account? The fall out could be huge.
Spread the risk by separating your business and personal finances.
Growing businesses commonly need overdraft facilities or loans for setup and growth.
Whoever you approach, they will ask to see your business bank account. If you present your personal account, not only may it affect your credibility but it will also make your applications a bit trickier.
Do you really want your accountant, lender or bookkeeper to see all your personal transactions and what you spend your money on?
By using a separate account, you only need to show them exactly what they need.
9 They are Cheap
The business banking market has moved on considerably in the last 3 years. And there are more options available now than ever.
More competition means there are better deals to be had, with many offering free accounts, no transaction fees or other financial rewards for choosing them.
Have I convinced you that opening a business bank account is a good idea? Great! Now, here’s how to do it.
Updated 20 June 2019
Anita is a Chartered Accountant with over a decade of experience taking self employed business owners from financially confused to business savvy.
She is the creator of the ‘Go Self Employed’ website, which her corner on the internet where she makes self employment less terrifying.