OK, so you’ve picked your business name. You’ve sorted your domain names. You’ve got your social media accounts sorted. Let’s start doing some work and earning some money! So how are your customers going to pay you? Do you actually need to have a business bank account in the UK? Or can you just use your personal account for business use? Let’s find out!
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Do you need to have a business bank account?
This is a really commonly asked question in the UK and it’s a decision you’ll need to make fairly early on since you can’t get paid by your customers if they don’t have anywhere to put their money!
- If you ask your bank they’ll almost certainly say YES you MUST have a business bank account
- If you ask HMRC they’ll probably say NO you don’t really need to have a business account
So which one is it? Well let’s look at some of the pros and cons of using a business account vs using a personal account. Later on I’ll tell you 2 very good reasons why you should set up a business account. For now though, you’re probably itching to make some money, so what happens if you just use your personal account?
Are you a limited company?
This website is predominantly for self employed folk, however if you have a limited company, registered on Companies House, you MUST have a separate business bank account. A limited company is a separate legal entity and as such you can’t use your personal bank account.
Are you self employed?
If you’re self employed on the other hand, technically there’s no legal requirement to have a separate business bank account. But, like everything in business, it’s not quite that cut and dry.
What are HMRC’s thoughts on this?
In the past HMRC used to say something along the lines of “You don’t need to have a separate business bank account but you must keep personal finances separate from business finances”. Now they don’t even say that, and that’s a good thing. It’s 2019 (at the time of writing) and the physical location of your money is largely irrelevant these days. Most people have money in a wide selection of different bank accounts these days. Adding yet another account to the mix for no good reason can be seen as being a little pointless. It all comes out in the wash when you do your Self Assessment tax return anyway, HMRC generally don’t care.
What are the banks’ thoughts on this?
The people who will tell you “you must have a business bank account” are the banks. That’s because most big banks are still living in 1965 and make considerably more money from you when you run a business account. Let me let you in on a little secret though.
For the last 20+ years of self employment I’ve just used my personal account for business banking and the banks don’t care. Not once have they pulled me on it. Even when I had a ‘personal bank manager’ at one stage I asked him, he said something along the lines of “Yyyyyyyyyyyyyeaaaah… I suppose you should probably have a business account, I’ll send you some information”. I never heard any more on the subject.
Now, obviously I’m not suggesting that you deliberately flout your bank’s terms and conditions. That’s entirely on your shoulders. All I’m saying is that in 20+ years it’s never caused a problem for me. I have however always had separate bank accounts for my limited companies.
What’s the point?
We’re living in a modern age where money from customers is often routed through payment handlers such as PayPal, Zettle and Payoneer. In many cases, such as Paypal, your money can then be used to buy goods and services. So technically PayPal is probably your bank account. From an HMRC perspective, if you’re on cash basis and pretend you haven’t received the money yet since you’ve let it all build up in your PayPal account… I don’t think that’s going to wash. HMRC will almost certainly treat PayPal as being your bank account and base taxes on when your customers made payment to your PayPal account. As such do you really then need yet another business account?
Also, if you do freelance work, have minimal outgoings and only get paid once or twice a month from the same client, does that really warrant having a separate business account for a handful of transactions? Probably not. That’s a decision you need to make. Have a look at my overview of a Tide business account though as that may be a great starting point to help you get your business off the ground with minimal hassle. I’ve also reviewed Starling Bank’s services and they’re well worth checking out.
What about cheques?
OK, this is probably one of the only practical reasons why you might NEED to have a business account. Do you need to be paid by cheque? Does anyone still use cheques? Last time a customer gave me a cheque was about 10 years ago. Anyway, if you want a cheque made out in your business name you’ll almost certainly need to have a dedicated business bank account.
What about BACS and Confirmation of Payee?
Confirmation of Payee is a system that is being discussed for UK banking but at the time of writing it’s been delayed by another 18 months. At the moment, to accept a bank transfer you just need to give the customer your account number and sort code. Confirmation of Payee may require that you also give the customer your account name. If you’re using your personal account then you’ll need to give that information to your customer, which won’t look as professional. So yes, once that comes in to play there may be issues. It’s not here yet though so don’t panic.
You do need a business bank account
Let me just briefly contradict myself. I’m just giving you options! If you have less than a totally arbitrary 50 transactions per month (absolute max!) going through your account, you could probably survive just using your personal account (bearing in mind all of the above). BUT… I’m not saying it’s a good idea to use your personal account for business. Here are 2 very good reasons why should should have a business account.
HMRC Audit
If you’re ever unfortunate enough to be audited by HMRC, one of the first things they’re going to ask for is copies of your bank statements. They might start cross-referencing receipts against business transactions. If these business transactions are hidden within hundreds of personal transactions, you’re going to have to be organised to borderline-OCD level to keep track of everything. Pinpointing exactly what transaction on a statement matches up to what transaction in your expenses log can be very tricky if everything is merged together.
The more you struggle to explain what’s what on your statements, the more HMRC will dig in to it. It’s not pleasant – trust me, been there, done that. Whereas if you have a separate business bank account, you just give HMRC a stack of statements and let them get on with it.
Reconciliation
The second reason for having a business bank account is reconciliation. This is especially important if you have an accountant. Reconciliation is where you take your entire income log, entire expense log and cross-reference everything against your bank statements. It’s not mandatory but if you don’t do it you WILL miss something.
If you have a separate business bank account reconciliation is relatively simple. Your ending balance minus your starting balance should be the same as your income log minus your expense log (operating on cash basis). If they don’t match you’ve probably missed something. A good accountant or book keeper will literally tick through every transaction on your bank statements and verify that a receipt exists for each item.
If your business transactions are mixed in with your personal transactions, reconciliation is almost impossible. That’s since your start balance and end balance include both personal and business transactions. Your accountant will hate you and HMRC will have a field day.
Accepting credit cards?
Remember, if you want to accept credit cards for your UK small business, this is really simple with the likes of iZettle. I’ve used them for several years now and it’s been awesome. You can buy a card reader for next to nothing and there’s no monthly fees. Check it out here.
To conclude!
- MUST you have a business bank account: NO
- SHOULD you have a business bank account: YES
The sooner you sort a business account the better, but don’t let that hold you back from getting out there and doing work! Sort it as soon as you can – with the likes of Tide or Starling you can be up and running very quickly. Don’t necessarily go with the big banks. There’s some really innovative solutions out there now for business banking. Many that come with apps to simplify the process of managing your business finances. Pick an account that meets the needs of your business.
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Originally published: 26th April 2019
Last updated: 29th October 2020
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