Becoming self-employed is a bold step and you may be wondering whether you need a business bank account.
Looking after your finances is essential if you are working for yourself because you are accountable to HMRC to correctly report your finances and pay taxes.
Here, we’ll look at why we advise people who are self-employed to have a separate bank account. First of all, we consider what it means to be self-employed.
What is a self-employment?
Increasing numbers of people are registering as being self-employed. According to data recently released, there are now 4.2 million people who have chosen self-employment – that’s a million more than the year before.
The ongoing pandemic means many people are deciding to become self-employed to realise a life-long dream while for others it’s through necessity.
Self-employment means is a term that indicates that the person is not employed directly by a company or another individual. Being self-employed means you can decide what work you do and with whom. While it is an overall-term self-employment includes:
- Freelancers
- Sole traders
- Contractors
- Locums
Sole traders make up almost 60% of the UK’s private business sector. The term means you are the exclusive owner of your business and you are entitled to keep all the profits after tax. It also means you are responsible for paying debts and are liable for any losses.
You can trade as a limited company and be self-employed, which means your business retains its own identity. We outline what you need to do to become a limited company in a previous blog.
Do sole traders need a business bank account?
Nothing legally prevents you from using a personal bank account if you are a sole trader. That means you can use your current account for all your business transactions.
HMRC regards you and your business as being one entity when you are a sole trader, so a personal account is fine. But there are a number of reasons why choosing to open a business bank account is better for you.
First of all, it makes life so much simpler. When filling in your self-assessment return you need to know what is business income and what is personal. You also need to declare any business expenses.
Should you decide to use your personal account, it makes life very complicated. Trying to filter out the payments made to your corner shop, fuel station or nights out from your ongoing business expenses makes life harder. You and your accountant will need to sift through a lot of data, which takes time and can be confusing.
Also, some personal bank accounts state in the terms and conditions that you cannot make business deposits into your personal account. If the bank realises you are breaching a contractual clause, they may ask you to stop or, at worst, close your account.
The benefits of a business bank account
There are a number of reasons why having a business bank account is advisable if you are a sole trader, freelancer or contractor.
- Cash flow simplified
As we’ve mentioned, keeping things separate does not only help when you need to pay tax, it helps with your cash flow. You know how much income you are making and can follow payments more easily. - Accurate tax returns
HMRC requires all self-employed people to declare their profits through self-assessment. Mixing up your business income with any personal, tax-free income could result in you paying more tax than you need to. And, as we’ve mentioned, it saves you time and stress picking through the figures. - Credibility
Clients paying you via a business bank account will feel more confident about using your services if you use a business account under a trading name. You don’t have to register a business name as a sole trader. But if your account says you are ‘trading as’ under a business name, you can use it on invoices. This demonstrates to clients that you are serious about your business. Some customers and suppliers are often reluctant to pay into personal accounts. - Business growth
You maybe only setting out, but the future holds a lot of possibilities. If your business grows and you take on employees it is easier if you have a business bank account. Applying for business finance is also easier than if you’re using a personal bank account. It also helps boost your business’s credit score, so a business bank account makes a lot of sense.
Which account should I choose?
Most banks provide business bank accounts. There are many online only accounts specifically for business, such as Tide, which is also geared up for using Xero and other accounting software. This Money Supermarket comparison can help you find one for you.
If you’re new to business, then we would be delighted to chat to you, so contact us today.