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Home Sponsored I'm a sole trader: do I need a business bank account?

I’m a sole trader: do I need a business bank account?

There are currently around 5 million people working as a sole trader in the UK. While most sole traders can operate using their own personal bank account, there are some instances where a separate business account could be highly beneficial.

What is a business bank account?

A business account is an account used solely for business income and expenditure. It can be a basic level account, similar to a personal bank account, or it could be more advanced and cover invoices and payroll (if you have employees), help with your annual tax return and overall accounting.

Who needs a business bank account?

As a sole trader there is no legal requirement to have a business bank account. A sole trader is not separate from their legal employment and so a separate bank account isn’t a requirement for the taxman.

You would legally need a business bank account if your business is, or becomes, a limited company. In this instance, your business is now separate from you.

If I don’t legally need one, should I have one anyway?

As with any option open to you as a sole trader, there are advantages and disadvantages. For some, a separate business account may not be suitable whereas for others it could be the way to obtain business growth in a fairly simple way. Here we look into the pros and cons of having a business account:

Business account pros:

Time saver - A business account would be used entirely for business incomings and outgoings and so when it comes to doing your tax return for HMRC, all the figures you need are in one place.

Building credit rating - If a business loan is something you may seek in the future, being able to provide a business account history will go in your favour. This will show that you have the ability to manage a business account, as well as how your payment behavior has been, i.e. if your outgoings more than your income on a regular basis or if the loan is affordable based on your historic business profits.  .

Business account cons

Fees - Business accounts come with a monthly fee, averaging around £5pm. In addition to this, there are fees on withdrawals, cash deposits and sometimes for other transactions too. Many banks have introductory offers, including free business banking for a period or 12 to 18 months. While this may seem a tempting option, always look into what the fees will be once the free period is over - banks will want to make their money somewhere. As a general rule, the more transactions you’re making through your business account, the higher charges are likely to be.

Time - Opening a business account isn’t an instant thing and can take days or even weeks. The bank is required to carry out different checks to confirm your identity, company and any directors who are registered to your business. Often you will be required to have a face to face meeting within the bank and provide the required documentation to open the account. In some cases you may need to provide documentation of your personal financial situation in order to show your banking history and credit rating.

As a rule of thumb, if you are going to be offsetting business expenses (eg, mobile phone, electronics, machinery, tools) against your income, then it may be worthwhile considering a separate bank account.

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