You’re starting a new business and you’re wondering whether you should open a separate business bank account. You’re aware that many banks offer free business banking for an introductory period. But then charges kick-in. So, do you really need a separate account?
Limited companies
If you are setting up your business as a limited company, then you and your company will be separate legal entities. As such, your company must have its own business bank account.
You should not use your personal account for your company’s banking transactions.
For more information on the key differences between operating as a sole trader and limited company, see: Sole trader or limited company – key issues.
Sole traders
If you plan to be a sole trader, you can in theory use your personal account for both personal and business matters. You and the business are the same thing – there is no separate legal entity.
So, you’re not legally required to open a separate account. However, we strongly recommend that you do so.
Key reasons for keeping things separate …….
Simpler book-keeping and lower accountancy fees. If you have one account, your business and personal transactions can easily become mixed up. You’ll have to sift through your bank transactions to figure out whether they are business or personal. You’ll then have to extract the business receipts and payments, to do your business book-keeping.
This can easily turn book-keeping from being a chore to a serious, time-consuming mess. If this happens, you won’t keep on top of it. And this will lead to various problems.
It’s also likely that your books will be harder for your accountant to review. It will take he/she longer to prepare your annual accounts and tax return. As a result, you’ll incur higher accountancy fees.
Using your accounting software efficiently. Following on from the above, you can use accounting software (e.g. Xero) to automatically download your business bank account transactions into it, knowing that all transactions are business-related. All you then have to do is classify the receipts and payments.
Your bank’s terms and conditions. It’s possible that the terms and conditions of your personal account state that the account should be for personal use only. If your bank finds out that the account is being used for your business, they may require you to open a separate business account. They may even threaten to close your personal account.
A more professional image. If you have a separate account, you’ll look more business-like in the eyes of your customers and suppliers, when compared to someone using their personal account. Indeed, some business customers don’t like to make payments into non-business accounts.
Easier access to more business banking products. If you want your business to take out a business loan, get a business credit card or take card payments from customers, then you’ll need a business bank account.
Dealing with HMRC. HMRC expects taxpayers to keep records which clearly separate business from personal expenses. If they enquire into your affairs, you’ll immediately be marked as a higher risk if you’re using one account. They will inevitably ask a lot more questions. And they are likely to start from the assumption that all receipts in your account are taxable income and all payments are personal in nature and therefore not tax deductible. It’ll be up to you to prove otherwise.
By having a separate account, you’ll deal with HMRC enquiries with a lot less hassle and help from your accountant. And you’ll keep HMRC’s gaze away from your personal private account.
VAT registration. If you grow your business beyond the annual turnover registration threshold of £85,000 or you voluntarily register for VAT, you must have a separate account. You might as well do this when you start up, rather than making the change when things are more complicated.
If you employ your spouse/civil partner. If you’re thinking of employing your husband, wife or civil partner, you should pay their salary from a separate business bank account into a personal account in their name. This supports your case for claiming their salary as a business expense. If you run a business through a joint personal account, you can’t show that you’ve made a separate salary payment to your spouse/partner for business purposes.
In summary, we always recommend that anyone running a business, be it a company or sole trade, opens a separate business bank account. In the long run, it will pay dividends by making your accounting simpler, saving you tax, minimising your accountancy fees and keeping you compliant with HMRC.
If you want to know more about starting a business, check out our Insights on when is the right time to start a business and business start-up tips.
We are a firm of specialist small business accountants and consultants. If you need start-up accountancy, tax and business advice, get in touch for a no-obligation, free discussion – see our Contact Us page for how to reach us.
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Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Whyatt Accountancy and the writer accept no responsibility for any loss arising from any action taken or not taken by anyone using this material.