Sole Traders: Should you have a business bank account?

You run your business on a self-employed basis and until now you’ve been operating only one bank account where you pay business and personal expenses. You do this because you save on bank charges, however there may be compelling reason to consider separating your personal and business activities.

Firstly the terms and conditions of your personal bank account may prevent you from using it for business purposes. In addition if you are trading under a business name for example A Smith trading as Smith Marketing you might not be able to accept cheques under your business name.

Secondly separating your business and personal activities can save you in accountancy fees which should more than outweigh the cost of bank fees for operating a business account. The reason for this is that when you operate a single account you can quickly mix up your business and personal expenses. To avoid this mix up you would need to record each transaction made as to whether it was for business or personal use which becomes time-consuming and tedious. If you don’t do this, your accountant will have to do it and hence charge you more to prepare your accounts.

Thirdly by keeping personal and business transactions separately you can more easily keep an eye on how you are doing in the short term by monitoring your business cash flow. You will also be able to plan for your tax liability much easier by keeping funds in the bank account to pay your tax payment when it falls due. This will reduce the risk of money being inadvertently spent elsewhere.

Lastly, should you be unfortunate enough to be selected for an Inland Revenue enquiry, it may be possible to cut short the enquiry. In the Taxman’s booklet: “Self-Assessment, a guide to keeping records” he advises that “whatever records you keep you will need to make sure that you can separate your business from personal expenses.” Therefore a good set of records can persuade the Taxman to close the enquiry without asking tedious questions. This will save you lots of sleepless nights and ultimately accountancy fees.

In summary you do not need a separate business bank account to operate as a sole trader, but there are various tax, accounting and business factors that you need to consider in making that decision.

Ibrahim Aziz Numerion Associates

Please email me at ibrahim.aziz@numerion.co.uk