Do I need a business bank account as a sole trader?

Starting a new business is an exciting journey, and how you choose to organise the business’s finances is an important decision.

In this blog, we look at whether you need a business bank account as a sole trader, as well as the pros and cons of choosing to open one. Firstly, you must understand what a sole trader is, to see if the term applies to you and your business.

What is a sole trader?

A sole trader is someone who runs their own business as an individual and is self-employed. They can keep all profits from the business after tax and are personally responsible for any losses the business makes. In the eyes of HMRC, a sole trader is the business.

This means that legally there is no requirement for a sole trader to open a business bank account, as HMRC consider the individual’s personal income and the business’s to be one and the same. That said, a separate business bank account can be useful for a sole trader, and therefore may be worth opening anyway, despite it not being a legal requirement.

Business banking for a sole trader

As a sole trader, if you find that your personal current account has no limitations for business purposes, legally you are allowed to run all business finances through it. However, most personal bank accounts have clauses within the terms and conditions that restrict business transactions, which could make it more difficult or more expensive to use for business purposes.

Some sole traders may be put off opening a business bank account due to being charged monthly or annual fees - although some do waive these fees for new customers for the first year or so. Most business accounts will also charge per transaction so there will be a small amount to pay for every deposit, withdrawal, when setting up a direct debit or transfer. Although these fees can be a little hard to swallow at first, especially if you're not used to paying a penny for your personal banking, there are many benefits of separating your business banking from your personal banking.

Clarity is the main reason that most sole traders choose to separate their business and personal finances. Being able to check if you’ve been paid and if outgoing payments have gone through provides clear visibility of cash flow all year round.

Having a separate account for all business finances will make completing your self-assessment tax return much easier too. HMRC will need to see exactly how much money the business has made, as well as any allowable expenses you wish to claim, such as rent, insurance, travel, and uniform. Having the business’s finances entirely separate from your own makes it much easier to distinguish between the two, instead of having to pick out business items from a sea of personal transactions.

Visibility and professionalism are added benefits of having a separate account as a sole trader. Having a business bank account means that you can provide the company name for the account on any invoices or financial transactions, potentially helping you look more established and giving you an edge over competitors.

If you plan to take out a business-related loan, or perhaps just want the option to do so in the future, it can be very beneficial to open a business account. It is unlikely that a bank will accept your request for a business-related loan if you only have a personal account with them. Once the business bank account is open, the business can start building a credit history and positive credit score, which could be the difference between being accepted or denied for finance in the future.

Finally, many banks offer additional services to support sole traders and small businesses. This ranges from advice from a local branch manager (for those who are lucky enough to have branches in the area), to more tech-based tools that allow a sole trader to manage their business finances more efficiently online.

Choosing the right business bank account as a sole trader

If you decide a business bank account is right for you as a sole trader, the next step is to decide which bank most suits your circumstances. Check out our business bank account reviews to see what genuine customers have to say about their accounts, to help you make an informed decision when choosing the best bank for your needs.