self employed woman

Managing your finances as a contractor, sole trader of locum can be confusing; there’s a lot of conflicting advice available and many questions that need answering when it comes to managing your business’ finance. You’ll want to make sure you’re making the right choices for yourself and your business, and, if you’re using your personal account for your self-employed income, you may be causing yourself more issues than you’re solving.

Today we’re going to discuss the benefits of business banking when you’re self-employed, who can and should make use of business banking and the things you should consider when choosing a business bank account.

Who Do We Mean By ‘Self-Employed’?

Before we start talking about business banking, we first need to establish who exactly we’re talking about. If you’re self-employed, you choose what work you do, when you do it, and how. Self-employed is an umbrella term that indicates that a company or another individual does not employ a person; they work for themselves and control what they do. This includes:

  • Sole Traders
  • Freelancers
  • Locums
  • Contractors

If you don’t have a company, you are likely classified as one of the 3.5 million sole traders that make up 59% of the UK’s private business sector. As a sole trader, you are the exclusive owner of your business and are entitled to keep all of your profits after tax, but you are also liable for debts and losses you may incur.

It is also possible for self-employed individuals to trade as limited companies. However, they will have different obligations than if they traded as a sole trader, as they will be classified as a separate legal entity.

Does A Sole Trader Need a Business Bank Account?

Business bank accounts are not a legal requirement for sole traders in the UK. Technically, it is possible to use your personal bank account for business transactions. As a sole trader, HMRC views your personal and business as one entity, so, as far as they’re concerned, using a personal bank account is fine.

However, just because you can use your personal account as a sole trader doesn’t mean you should. There is little to no benefit in using a personal account for your business outside of the fact that the account presumably already exists. You may even find that your existing bank contract contains a clause restricting you from depositing business income into your personal account.

As sole trader accountants, we always advise that self-employed individuals explore the business banking options available to them. Even though HMRC does not separate your personal and business income as a sole trader, they do still require evidence of how much money your business has made. If you’re are using a personal account for everything, it can be challenging to accurately ascertain how much your business is making and complicates claiming back expenses.

businesswoman

What’s The Difference Between a Personal Account and A Business Account?

On the surface, personal bank accounts and business bank accounts designed specifically for the self-employed are similar. In both cases, the money in the account is legally yours, and you will have a payment card and online banking. But, there are some noticeable differences.

Personal bank accounts are usually free to set up and maintain, whereas business accounts often come with monthly account fees, charges for transactions, or both. Also, whilst some personal accounts will pay a low rate of interest, most business accounts pay no interest.

You may be left wondering why you would want to set up a business account if it means incurring costs that you would otherwise avoid with a personal account. Although there are often costs associated with a business bank account, they also come with many useful features, tools and perks that you do not get with a personal account. These may include:

  • Invoicing tools
  • Receipt uploaders
  • Synchronisation with your accounting software
  • Accessibility to business loans
  • Free business advice
  • Access to networking opportunities, events and training

When you consider all of the above, it becomes easier to understand why it’s worth paying account fees for a business bank account. If you’re still hesitant, don’t worry – it’s still possible to open a business bank account for free when you choose Gorilla Accounting.

We’ve partnered with Mettle, Natwest’s free business account, to offer business banking for contractors and freelancers and sole traders. Mettle has been designed specifically to help small businesses get off the ground and was built with sole traders and startups in mind. It syncs seamlessly with FreeAgent accounting software, free for all Gorilla customers.

The Benefits of A Separate Business Account

There are many benefits to opening a separate bank account as a sole trader, freelancer, contractor. Even though it can be tempting when you’re starting as self-employed to use a personal account, consider the following benefits you’ll get from opening a separate business bank account:

Simplify Your Cash Flow

Having a separate business bank account will allow you to manage your cash flow more effectively since you won’t have personal transactions intermingled with your business transactions on your statements. You’ll be able to keep track of customer payments, whether you’ve paid your suppliers and how much money your business has.

Accurate Tax Returns

When the time comes to submit your tax returns, you’ll avoid having to comb through combined personal and business expenses. A separate business bank account means you can quickly identify taxable benefits and deductions in line with HMRC requirements, and you’ll be more prepared in the event of an audit. As small business accountants, we understand the importance of ensuring businesses of all sizes comply with HMRC regulations.

Business Credibility

Building and maintaining business credibility is crucial to building trust between you, your suppliers and your customer base and enhancing your professional image. Making and receiving payments through a separate business bank account demonstrates to people that you take your business and your finances seriously. You may even find that some customers and suppliers are reluctant or are not permitted to do business with someone using a personal bank account.

Efficient Bookkeeping

It may seem quick and convenient to use a personal credit or debit card for business expenses. Still, it can lead to headaches in the long term when calculating business expenditure. A separate business bank account allows for faster, accurate and efficient bookkeeping – saving you money in the future.

Some Banks Require A Business Bank Account

As touched upon early, some banks will not let you use a personal bank account for your business, and they certainly will not offer you a loan or credit for your business without a separate business bank account.

A Better Credit Score

Having a good credit score will allow you to secure flexible business loans and insurance terms in the future. There are many ways to grow your credit score, but one contributing factor is keeping your business finances separate from your personal transactions. This will lead to well-informed financial decisions.

Business Growth

Eventually, you might look to expand your business by turning it into a limited company, taking on employees and applying for business loans to fund your growth plans. By setting up a business bank account from the get-go, you’ll be laying the foundations for this potential growth, making it much easier for yourself in the future. As limited company accountants, Gorilla will be with you every step of the way as your business grows.

As you can see, they are many reasons why settling up a business bank account as a sole trader, contractor, or freelancer is preferable over using your personal account. So, now you’ve decided that you need a business bank account, what should you look for?

bank

What To Look For In A Business Bank Account

When looking for a business bank account, there are a few things you should consider:

Features & Services

Look for providers who offer services and features that your business will benefit from. This could be things like online and mobile banking functionality to bill payment services and card access.

Fees

Many banks will charge monthly account fees and/or transaction fees, as discussed earlier. Ensure you’re aware of the costs involved, what you’ll be getting for your money and the cost of services such as overdrafts, ATM withdrawals and any other maintenance fees.

Signing Up Bonuses

Some banks will offer incentives in the form of reduced fees for a period of time or cash bonuses. It can be easy to be lured in by a sign-up bonus, and they may be beneficial to you, but remain diligent before committing to the bank with the most attractive sign-up bonus. You’ll need to work out whether your business will be able to satisfy the conditions of the fine print and check that you won’t end up paying more down the line in fees.

Integration with Accounting Software

If you’re already using accounting software to help manage your business finances, a priority should be seeking a provider who can synchronise your business bank account with your existing software to keep things streamlined. For example, Mettle syncs with our FreeAgent accounting software, so you’ll never miss a transaction.

Transaction Limits

Some providers will cap how many deposits, withdrawals, transfers and payments you make each month. So, when looking for a business bank account, find a provider who suits your business needs so you don’t end up getting penalised for exceeding your transactional limit.

Accessibility

Ask yourself how you feel comfortable accessing your account. For example, are you happy doing everything remotely through online and mobile banking, or would you prefer knowing that you can visit a branch in person for a face-to-face service?

If your business relies on depositing physical cash, you’ll need to ensure you’ve got a local branch that you can access easily. If your business is entirely online and all transactions are made digitally, you can consider providers who don’t have a physical branch.

The Credibility of the Provider

Always choose an FCA-approved provider to ensure they meet the financial conduct authority regulations, but beyond that, if you want to know what a bank is like before opening an account with them, look at reviews and get feedback from people who have used them. You’ll be able to get a feel for whether the provider is efficient or slow to process things, their customer service and how easy it was to set up an account with them.

When Is The Right Time to Open a Business Bank Account?

It’s up to you as the owner of your business to decide when it’s time to open a business bank account. However, some guidelines can help you make that decision. You should consider setting up an account if:

You Are Processing A Lot of Transactions

If you’ve been trading using your personal account for your business and you’re processing a high volume of transactions, you should open a business bank account. Remember that many banks will not allow you to use your personal account for business use, and you could get into trouble if you continue.

Your Struggling to Decipher Between Personal and Business Transactions

If your personal and business transactions have become mingled together in one account, and it’s making life difficult for you when you come to complete your tax return, then it’s time to open a business account. This will save you a lot of time and energy in the future.

You Require A Business Loan

You’ll need a business bank account if you want to apply for a business loan or if you wish to apply for a business credit card.

You’re Taking On Employees

If your business is growing and you’re taking on employees, it is recommended that you open a business account to manage your payroll efficiently and reduce the risks of paying employees incorrectly.

You Plan On Operating As A Limited Company

If you want to trade as a limited company, then, by law, you will need a business bank account as you will not be able to register your business without one.

Architect Inside House Being Renovated Working On Plans Using Laptop And Talking On Cellphone

Setting Up A Business Bank Account

In order to open your new business bank account, you’ll need some documentation. The amount of information and the time it will take to process and set up your account varies depending on your chosen provider. If you choose to take advantage of our partnership with Mettle’s free business banking for contractors and freelancers, you’ll need one of the following pieces of information:

  • Valid Passport
  • EU ID Card
  • UK Driving License (full or provisional)
  • UK Biometric Residence Permit (BRP)

Before you apply, you should also check that your business meets the provider’s eligibility criteria. To open a free business account with Mettle, you’ll need to meet the following conditions:

  • Your business must be registered and trading in the UK
  • You are a UK resident with a UK phone number
  • You have an iOS or Android device to set up and manage the account
  • Your maximum account balance will not exceed £50k as a sole trader or £100k as a limited company
  • You are 18 years or older

As small business accountants, we understand how important your business finances are and can help make the right decision when opening a business bank account. We’ll work with you to ensure you avoid spending more money than is necessary on fees and services that you won’t use. If you would like any more information about our partnership with Mettle or our accountancy services, do not hesitate to contact us today.

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