Personal finance vs business finance: How to keep your accounts separate

The main difference between a personal account and a business account is that a business account is specifically designed for managing company finances, offering features like expense tracking, tax management, and compliance with legal obligations. A personal account is intended for individual use and lacks these business-oriented functions. Keeping these accounts separate simplifies cash flow monitoring, makes bookkeeping easier, helps reduce tax liabilities, and ensures compliance with financial regulations.

Getting organised when it comes to your finances is an important part of running a successful business. However, many self-employed small business owners fall into the trap of using their personal current account to run the operation, which means that their personal and business expenses become intertwined.

This article will explain how to keep your personal finances separate from your business, by looking at the following areas:

●        Why personal and business finances should be kept separate

●        Tips for how to keep your personal and business finances apart

Unless you are registered as a limited company, you are not legally required to open a separate business account. However, here’s why we highly recommend that you do:

To keep a business in good financial health, cash flow management is vital. This becomes more challenging when your personal transactions are mixed in with business funds.

To get a clear picture of what your cash flow really looks like, this would likely involve the painful combination of data entry and spreadsheets. Mixing business and personal expenses can also keep problem areas hidden, preventing you from finding ways to improve your bottom line and grow your business.

When you mix your personal and business expenses, bookkeeping can take longer to manage. Trying to account for and distinguish between different types of spending is a drain on your precious time as a sole trader. If you are paying an accountant by the hour, asking them to differentiate between personal and business transactions will quickly rack up a big bill.

Separating business and personal expenses will help you claim back your allowable business expenses – and effectively pay less tax. This applies to sole traders, self-employed people and limited companies.

Deductible expenses become harder to identify when they are mixed in with personal bills. The situation worsens if you wait until the end of the month – or worse, tax year – to categorise your expenses. You might even mistake personal expenses for business costs, which could result in penalties from HMRC if you are audited.

According to HMRC, sole traders and the self-employed must keep records for five years after the 31 January submission deadline of the tax year. Limited companies are required to keep business expense receipts for six years.

However, printed receipts are easy to lose, especially when they’re mixed up with personal receipts. If your business has lots of expenses then six years’ worth of records is a great deal of paperwork.

The Countingup business account and app enables you to make payments, automatically categorises business expenses, and reminds you to take a picture of your receipts as soon as you’ve bought something. This removes the hassle of organising your receipts and updating spreadsheets.

Here are some of the best ways to separate your finances and keep it that way:

Depending on your business, it may benefit you to run it as a limited company. Unlike a sole trader arrangement, a limited company is a separate entity from its owners. All assets and liabilities are treated separately from the shareholders’ and owners’ finances.

Operating as a limited company may bring tax benefits, and you’ll also have the reassurance of limited liability. This means you won’t be personally responsible for any of the business’s financial losses or debt, and your personal assets cannot be seized to pay them.

This is the most important step towards having separate personal and business finances, so if you haven’t already, open a business current account that allows you to have a card.

It will become simple to use your company card for business expenses and protect your personal cash from any unforeseen business expenses.  If you’re strict about using this account for business purposes only, then it will be easy to see an accurate picture of your business income and spending.

Make it a regular thing to pay yourself a salary from your business bank account into your personal one. If you’re currently using one account for both personal and business, this is a step in the right direction towards separating your business money from your personal cash. It also saves you from dipping into either fund accidentally.

Just as you don’t want to take more money out of your business than you can afford, you also don’t want your business to pull more money from you than your personal finances can afford. It’s common for entrepreneurs to use their own cash to bump up the business cash flow, which you may have to do at some point. Setting a budget for your business will reduce the likelihood of having to do that, and it will be easier to keep your personal money separate from that of the company.

You can read more about how to set effective budgets here.

Finding tools that help you manage your business finances will save you a lot of time when it comes to accounting admin and bookkeeping. Using an account and app like the one that Countingup provides gives you structured reports and insights about your current financial health and tax estimates and automatic categorisation of your business expenses. 

Using an app like this will eliminate a lot of the issues you may have encountered when running your business and personal finances from the same account.

By setting up a Countingup business current account, you can keep your personal and business expenses separate, and manage all your financial data in one place. The app comes with free built-in accounting software that automates the time-consuming aspects of bookkeeping and taxes. You can view real-time insights into your business’s finances, including profit and loss statements, and you’ll be able to create and send invoices in seconds.

Save yourself hours of accounting admin so you can focus on growing your small business. Find out more here.