Do I need a business bank account?

One of the first questions that people ask when setting up as a freelancer or self employed is “Do I need a business bank account?”

Firstly, it depends on whether you are going to trade as a limited company or as a sole trader.

If you’re going to trade as a limited company, you will almost certainly need a business bank account. This is because of the legal separation of you, as the business owner (shareholder/director) and the limited company itself which is a separate legal entity. If customers pay money owed to your limited company straight into a personal bank account in your name, it could cause additional tax liabilities.

If you’re going to trade as a sole trader, then “you” are the business, legally, so there is no legal distinction between you as the the business owner, and the business itself. You can, therefore, use a personal bank account, but most banks prohibit business use of personal bank accounts. So it depends on the terms and conditions of your bank.

Regardless of the “legalities”, you should at least keep your business and private transactions separate, i.e. use different bank accounts to segregate your personal and business payments and receipts. This keeps things “tidy”, but more importantly, makes your book-keeping simpler as you only have to concentrate on the “business” account. You won’t then have to record private transactions which have gone through your business bank account, making your bookkeeping quicker and simpler.

Another good reason to separate business and private transactions is that HMRC have the power to demand sight of bank statements for all accounts through which business transactions have been entered, so if you use a private bank account for, even, occasional business transactions, HMRC are within their powers to demand your bank statements for that account. This makes a tax enquiry more time consuming and expands the scope of their enquiry.

Finally, some business bank accounts come with added benefits, such as a free FreeAgent book-keeping software licence for business account customers of Nat West Bank and their associates banks, being Mettle, Royal Bank of Scotland and Ulster Bank.