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Do You Need a Separate Business Bank Account If You’re Self-Employed?

Wondering whether you should open a separate business bank account if you’re self-employed or just use your own account? Then this guide is for you! There’s much to take into consideration when opening up a self-employed bank account. To help you decide, I’ll explain more about business bank accounts for the self-employed, whether you REALLY need to open one and the most popular bank accounts that the self-employed community are talking about.

Updated 15 September 2021

1. Do You Need to Open a Business Bank Account If You’re Self Employed?

As a self-employed individual, you are not legally obligated to open a business bank account, although it is recommended by HMRC. If you have chosen to form a Limited Company, then you’ll need to open an account in the name of your LTD, ideally before you start trading.

2. Can I Use My Personal Account for Business as a Sole Trader?

You can use your personal bank account for your business and many sole traders do choose to do this. However, HMRC does prefer you open up a separate bank account. This is particularly so in the recent coronavirus pandemic; the bounce back loans and self-employed income support grant could only be paid into a business bank account. This caused much panic amongst freelancers and the self-employed who rushed to open business accounts. As a result, it left the banks inundated with applications and many even closing their waiting lists.

Besides the recent rush, there are other reasons to open a business account including:

  • It’s a cheap and easy way to make bookkeeping and business record-keeping simpler;
  • It’ll stop you inadvertently dipping into your tax money;
  • It gives you added credibility in front of your clients;
  • All your payments and subscriptions come out of a separate account, leaving your personal money untouched;
  • You’ll get tax relief on bank charges of a business bank account as an allowable expense;
  • You can access business facilities such as overdrafts and business loans as your business grows;
  • If you use an accountant, you may not want them to go through all your personal spending;
  • In extreme cases, if the tax-man investigates you, they may choose to freeze your bank account so you’ll be unable to access your personal account if you’re using it for business.

3. How to Choose a Self Employed Bank Account

The promise of free banking, easy opening or low-cost charges can be tempting. But before you set up a self-employed bank account, take some time to look beyond all the promises. Make sure you know exactly what the bank charges once all the offers have come to an end. Here are some important things you should think about:

3.1 What are the monthly charges once free banking has expired?

Many accounts offer free accounts for 6, 12 or even 18 months. Therefore, make sure you know what the charges are once this free period has finished. You may find the charges are so high that they outweigh the benefit of any free period. Switching business bank accounts can be time-consuming, especially if you have to tell customers about changes in your bank details. Additionally, you may end up needing two business accounts at the same time while you switch banks.

3.2 Do you need to make international payments, deposit cheques or withdraw cash?

For many banks, this attracts charges. If you need to make regular international payments or withdraw cash, check their charges because they can easily rack up. And, if you have customers that pay you by cheque, it will make sense to check there is a physical branch near you so you can easily make deposits or any other counter transactions.

3.3 Is the mobile banking app user-friendly?

Different banks offer different functionalities via their banking apps. Whichever account you choose, ensure the app will do all the main things you need on a day-to-day basis to make your life easier.

3.4 Do you think you’ll need business borrowing or an overdraft?

Some banks are geared more towards transactional banking rather than offering lending facilities. If you feel that you may want to look at lending in the future then check what is on offer.

There are a number of business bank accounts for sole traders out there and one of the most popular options is from Starling.

Starling was founded by Anne Boden (you can find out more about her interesting story of the ultimate girl power here). Plus, it’s an established bank account. You are, however, required to open a personal bank account to get a sole trader account. Despite that extra hassle, Starling receives rave reviews from everyone I speak to and offers some really good features including:

  • No monthly fees
  • Full UK sort code and account number
  • No fees overseas
  • Real-time notifications
  • 24/7 support
  • Connect with accounting software like Xero so you can fully automate your bookkeeping
  • Access to the business toolkit to help manage your accounting (at an additional fee)

Finally and perhaps most importantly, Starling is FSCS protected. This means eligible deposits are covered up to £85,000 by the Financial Services Compensation Scheme in the event the bank fails.

Find out more and open an account with Starling here.

5. What You’ll Need to Open Your Account

Opening a business bank account involves a lot of paperwork so it will help to prepare yourself first. Regardless of whether you go online or into a branch, you will need to provide certain information so that the bank knows who you are. This is to do with money laundering requirements or what the bank called KYC: Know Your Customer Checks. Some high street banks allow you to apply online, but will still require you to go in branch to complete the sign-up process as part of KYC.

Here’s some of the information you should have ready:

  • Proof of your identity with a document such as a passport or driving licence.
  • Proof of your address with something like a driving licence, recent bank statement or mortgage statement
  • Details of your business, its trading name and address
  • A brief description of what your business does, expected turnover and an idea of money coming in/going out
  • Your own personal details such as name, address, phone number, date of birth and residential status.

Setting up the right kind of business bank account has a lot of positive appeal related to it. For example, ensuring you keep your business income and expense separate from your personal finances. Plus, it’s good practice to have the basics of your business in order from the beginning; just make sure you do your research to find the right one that matches your needs.