Do you need a business bank account?

In the course of running your business, you might have wondered whether or not you have to use a business bank account to manage your finances. The answer depends on your business type:

• If you’re the director of a limited company then yes, you really should set up a business bank account for the company.
• If you’re a sole trader or a partner in a partnership then no, you can technically use either a personal bank account or a business bank account.

While the answer to this question seems simple, there are a few finer details. This guide will answer the most common questions that business owners have when it comes to deciding how to set up their business banking.

Why do limited companies need a business bank account?

A sole trader is considered the same legal entity as their business - so if the business is in debt then so is the individual, for example. A limited company director, however, is not the same legal entity as the company they run. As the company is a separate entity, it should have its own bank account that is separate from the personal finances of the person or people who run it.

Benefits of having a business bank account for sole traders

If you’re a sole trader, HMRC doesn’t mind if you use a personal bank account for your business transactions. However, there are a few reasons why you might open a business bank account anyway:

1. Keeping your accounts organised

Using a business bank account enables you to keep all your business transactions separate from your personal transactions, so it’s easier to keep your accounting records organised in order to report them accurately to HMRC.

In FreeAgent, for example, you can set up a bank feed for the bank account that you use for your business transactions. Every time a transaction comes into or goes out of that account, your books will be updated automatically. When it’s time to file your Self Assessment tax return, all you need to do is check over the form, fill in the missing boxes and send it to HMRC directly from the software.

If your personal finances were mixed in with your business’s data, you or your accountant might have a tough time preparing your accounts and tax return.

Find out more about connecting your bank account to FreeAgent

2. Avoiding restrictions

A number of banks also place restrictions on personal bank accounts which state that they should be used for non-business purposes only. If this is the case, your bank might close your account if they see that you’re using it for business transactions.

There are often things you can do with a business account that are impossible with a personal account. For example, with most business bank accounts you’ll be able to:

• carry out transactions in foreign currencies
• carry out credit checks on businesses and suppliers you work with
• process salary payments

You’re unlikely to be able to use a standard personal account for these purposes.

If you're considering using a personal bank account for your business, even one that’s different from the bank account you use for your personal finances, you should always read the terms and conditions to ensure you're not breaking any rules and that the bank account allows you to do everything that you need it to do.

3. Appearing more professional

With a business account, your customers and suppliers will be able to make and receive payments that include your business’s name, not just your personal name.

Can you use an ISA as a business account?

Whatever your business type, HMRC doesn’t allow you to run your business finances through an Individual Savings Account (ISA). Money in an ISA has to be ‘personal’ money, so in order to transfer income earned through business activity into the ISA you would first have to declare it in your Self Assessment tax return and pay tax on it.

Choosing the right bank account for your business

Not all business bank accounts are the same, and it’s important to compare your business’s needs with what the account offers. You might need an account that enables you to process a lot of cash and cheque transactions, for example.

You should also check whether you get anything extra with the account. For example, with a NatWest, Royal Bank of Scotland or Ulster Bank business current account, or a Mettle bank account, you can get FreeAgent accounting software free of charge for as long as you retain your account. Optional add-ons may be chargeable.

Find out more about how to get FreeAgent accounting software for free

How to open a business bank account

For many banks, you can open an account either online or in a branch. Some banks don’t have physical premises so online is the only option. To find out exactly what you need to do, go to the bank’s website and follow their instructions.

What documents do you need to provide?

To open any business bank account you’ll need:

• proof of ID and address - a driver’s licence and utility bill, for example
• business address
• contact details
• estimated annual turnover
• Companies House registration number (for limited companies and partnerships)

This is a standard list and depending on the bank you might need to provide more or less information.

How long does it take to open a business bank account?

The time it takes to open your bank account varies depending on the bank and the type of account. It’ll usually take up to four weeks for the bank to carry out the necessary checks. The process can be quicker for sole traders as there are fewer details to check. Some online banks claim to provide an even faster service.

Can you claim back the cost of a business bank account?

HMRC says you can claim tax relief on business costs for bank charges. Download our A to Z of expenses guide to find out what other costs you can claim tax relief on.

Does it matter which country my business bank account is in?

Although it’s not a legal requirement to have, for example, a UK bank account for a UK limited company, HMRC states that businesses would normally set up a bank account in which their business is incorporated and managed, and it “strongly recommends” that UK bank accounts are used for business carried out in the UK.

If you’re in any doubt about how to set up a bank account for your business, seek advice from your accountant before you make a decision.