If you’re setting up as a sole trader, either running your own business or working as a freelancer, you’ll need access to some business tools. But does that have to include a business bank account?
In this guide, we’ll look at whether or not sole traders need to have a business bank account. We’ll run through the pros and cons of having one, plus anything else you need to know about.
Legally speaking, you don’t need to have a business bank account as a sole trader. You will of course have financial and tax responsibilities, but the law doesn’t require you to run your business finances through a dedicated business account.
If you prefer, you can carry on using your personal bank account for business transactions. But as your business grows, you may encounter a few snags with this. Here are just a few things to think about:¹
Your accounting can become complicated and disorganised. You need to keep things clear and simple for accounting purposes, and for completing your tax return for HMRC. If your personal payments are mixed up with business expenses, this can make accurate calculations and record-keeping trickier.
It looks unprofessional. It can look a little unprofessional to use a personal bank account for business purposes. Ideally, clients should be making payments to an account held in the name of your business.
Your bank may insist you switch to a business account. Most banks have terms and conditions for personal accounts stating that they mustn’t be used for business purposes. If there are a large number of business transactions passing through the account, this can raise a red flag. Your bank may get in touch and insist you open a business account instead.
You’re legally required to have a dedicated business account if you run either of the following business types:²
- Limited company
- Limited Liability Partnership (LLP)
Under UK law, all transactions relating to the running of these businesses must flow through a business account, and not a personal one.
If you do want to move money from a business account to a personal one (for example, to pay yourself a director’s salary), there are specific legal processes you’ll need to follow.
While it’s not mandatory for sole traders to have a business bank account, you will need one if you’re setting up a limited company as a sole trader.
It’s not just the legal structure of your business that affects your banking needs, however. If you plan to take customer card payments or apply for a business loan or funding grant, you’ll need to have a business bank account.
Most high street banks offer business bank accounts to sole traders. Some will have dedicated products just for sole traders, but most others are just ordinary business bank accounts.
If you’re planning to apply for a business account as a sole trader, there are a few things to bear in mind.
Business accounts are different to personal accounts. Firstly, in the fees they charge. While many personal accounts are free, business accounts usually come with a monthly charge or a per-transaction fee. However, you can also find accounts with an initial fee-free period.
You won’t usually earn much interest with a business account, but you will be able to access more advanced banking services. For example, a higher threshold for transactions, increased overdraft limit and a business credit card.
The main benefit of having a business account as a sole trader is clarity. Your business accounting and cashflow will be much more straightforward, which makes filing a tax return much easier. You’ll be able to be more organised with your financial planning, and spot potential problems with cashflow much earlier.
A business bank account is also a vital tool for a growing business. If you want to expand and start taking customer card payments or apply for a loan, you’ll be thankful you decided to open a business account. It also looks far more professional when dealing with other businesses.
Besides easier accounting, there are other perks on offer with sole trader bank accounts.
For example, you may be able to access specialist business support to help grow your business. The bank may give you discounts on professional products and services, such as accounting software for example. You may also be able to access loans or other forms of business finance.
You can usually send and receive international payments with both business and personal bank accounts, but there’s often a catch. Banks tend to charge high transaction and currency conversion fees, and could also sting you with unfavourable exchange rates. If your business needs to send money to suppliers or get paid by overseas clients, this can make these transactions far more expensive.
But luckily, there is a money-saving alternative available. Open a Wise Business account and you can send money worldwide for low fees and the real, mid-market exchange rate.
It’s the ideal option for freelancers, entrepreneurs and freelancers, allowing you to invoice like a local and swerve high currency conversion fees.
You’ll even get a Wise Business debit Mastercard for those essential business purchases. And for easy cashflow management, it can all be seamlessly integrated with accounting software like Xero.
So, should you get a business bank account as a sole trader? It all depends on the needs of your business. If you’re finding accounting a nightmare and you can stomach the fees, a business bank account could be the way forward.
But if you’re managing well with a personal account, it’s not mandatory to make the switch – or at least not yet. You can simply take advantage of other handy financial solutions like Wise as and when you need to.
Sources checked on 26-January 2021.
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.
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