One of the worst things about setting up a new business is all the decisions you have to make. Should you set up as a limited company or a sole trader? What should you be charging? Do you need an accountant? (YES!)
But one question people often forget to ask themselves is whether they need a separate business bank account. Of course, if you are a limited company that decision is made for you, as you are legally required to have a business bank account. This is because any money belongs to the business and not you personally. But if you are a sole trader, you can use your own personal bank account if you want to.
And while that might seem like the easiest solution, especially when you are first starting out, we would always recommend keeping your business transactions separate. Here’s why.
1. It makes your life a lot easier
Whether you’re using an accountant or sorting out your accounts yourself, life is so much simpler when your business transactions are separate from your personal ones. Yes, when you first start out in business, it may be relatively easy to keep track of what’s what, but as your business grows, that will start to get a bit more difficult, and do you really want to waste hours of time trying to remember whether a particular transaction was business or personal?
With separate accounts, your bookkeeping is just so much simpler. And, of course, it also means your accountant won’t know all the ins and outs of your life. We’re not suggesting you are up to anything nefarious, but do you really want your accountant to know about that thing you bought!
2. It ensures your tax returns are accurate
Having a separate business bank account ensures you pay the right amount of tax and don’t miss out on any possible tax breaks.
You might be convinced you’d never make a mistake but something as simple as including non-taxable income, such as a cash gift, in your tax return means you’ll end up paying more tax than you should, and nobody wants that.
Also, there are a number of potential tax write-offs, such as travel expenses and phone bills, that you may forget to claim for because they are all mixed up with your personal finances.
3. It helps you keep track of your finances
An important part of business is having a clear overview of your finances and being able to tell at a glance how well your business is doing. The last thing you should be wasting time on is unpicking your bank balance to work out if you really can afford that new piece of equipment for the business.
By keeping things separate you’ll have up-to-date information on the health of your business which in turn will help you make the right business decisions.
4. It stops the taxman being too interested
Blurring the lines between personal and business not only makes things more difficult for both you and your accountant, it also makes things much more interesting for the taxman. After all, are those business expenses really business expenses or are you trying to pull a fast one?
Mixing business and pleasure means there is a good chance HMRC will want to take a look, just to double-check everything is above board. And if they do find anything untoward, don’t expect them to be very forgiving!
5. It makes your business trustworthy
A big part of business is your reputation and part of that is coming across as professional. But like it or not, giving someone your personal bank details just doesn’t give that impression. In fact, it may even suggest you are just playing at business and shouldn’t be trusted.
Your customers and suppliers need to feel safe and secure working with you and part of that is having a separate business bank account. And it’s also worth knowing that some larger companies may even refuse to make payments to a personal bank account.
6. It enables you to apply for loans or credit
If you are planning on growing your business and think you’ll need some extra funds, then in most cases you will need a business bank account to qualify.
7. It prepares you for Making Tax Digital
Making Tax Digital for Income Tax Self-Assessment may have been pushed back until April 2026, but that doesn’t mean you shouldn’t start preparing now.
As we’ve mentioned before having the right software in place is crucial and given some software automatically links to your bank account to import all transactions, the last thing you want is for it to be importing all your personal stuff as well. Set up a separate business bank account and you just won’t have that hassle.
Hopefully, this has given you some insight into why having a separate business bank account is so important. And even if your business has been going for a few years and you’ve got used to all your business transactions going into your personal bank account, we would still encourage you to set up a separate business account. You’ll thank us when your next tax returns are due!
