When starting a new venture as a freelancer or small business owner, you want to make sure you have your finances in order before you start selling your products or services. You need an account with a financial institution to accept payments from customers and pay your bills, taxes and other costs.

But do you need to set up a business current account, or can you use your personal account for your income and expenses? 

This guide will cover:

  • What is a business bank account?
  • Do I need a business account as a sole trader?
  • Why sole traders might consider opening a business account
  • Do I need a business bank account as a small company?
  • How to set up a business account

Whether you’re a sole trader or a small business owner, read on to find out when you need a business account and how Countingup can help.

What is a business bank account?

A business account is just like your personal bank account, except it’s solely meant for your business income and expenses. 

Business accounts can range from a simple money in, money out setup to one that helps with invoicing, payroll, accounting and tax return. 

While business banking is not usually free, account providers such as Countingup offer extensive services for affordable prices. 

Do I need a business account as a sole trader?

As a sole trader, you have no legal obligation to use a business current account for your finances. That said, you may find that your personal bank has regulations that restrict you from depositing income that’s not personal. 

However, even if your bank allows you to deposit non-personal income, there are many reasons to consider opening a business account: 

  • Providing clarity –– Mixing your personal costs with business expenses in the same bank account makes it difficult for yourself, your accountant, or other third parties to calculate your taxes correctly for HMRC. Therefore, a separate business account will help ensure that you get taxed the correct amount for your company.
  • Simplify your admin –– Having a dedicated business current account helps you manage your finances more efficiently since you don’t have to sort out which expenses are personal and business-related.
  • Build your credit rating –– Financial institutions may check both your personal and business credit history when considering if you’re a viable candidate for a business loan. Having an account in your company name can help build up your business credit rating, which could help you apply for financial backing.
  • To look professional –– Some clients may not like making payments to a personal account because they think it looks unprofessional and unsafe. A business account helps overcome that barrier. 

Do I need a business bank account as a small company?

Limited business companies in the UK do need to have a business account since your company is a separate legal entity from yourself. This means the money deposited into your business account belongs to the company. Therefore, you should not use a personal account for any of your business income or expenses. 

A business current account also adds a look of professionalism the same way it does for a sole trader –– and perhaps even more so for a limited company. Some clients may know that limited companies need business current accounts to accept payments and avoid your company as a result of you using a personal account.

Additionally, some businesses may have policies against business-related payments into personal accounts, meaning you could miss out on valuable sales or work. 

What rules do I need to know about business accounts?

There are some rules and responsibilities you should be aware of when opening your business account.

For example, if you take out money from your business that isn’t for paying salaries, distributing dividends (profit shares) to your shareholders, or paying yourself back for business expenses you paid personally, it will be treated as a director’s loan. When taking out a director’s loan you must follow strict rules on how and when to pay it back and the tax payable on the repayments. 

You also need to pay tax personally on the money you take from the limited company business current account as salary and dividends. We explain how this works in more detail in this guide. 

If you’ve recently transferred from being a sole trader to a limited company, we recommend registering any changes to your business with HMRC to avoid financial complications like getting charged the wrong tax amount. 

What do I need to open a business bank account?

Opening a business current account in the UK, you usually need to have the following documents and details handy:

  • Proof of ID (passport, photo driving license or national ID card) for all named company directors.
  • Proof of address (recent bank or council tax statement or utility bill).
  • Complete business address (including postcode)
  • Contact details (phone number and email address)
  • Companies House registration number (for limited companies and partnerships)
  • Estimated annual turnover.
  • Proof that you have a decent credit score. Certain business current accounts, like Countingup don’t run credit checks, so applying online will not affect your credit score. 

How to open a business account

The pandemic accelerated digital banking and caused some traditional banks to allow customers to open business accounts online. However, you’re often required to share a number of documents and the application process can take weeks. 

Challengers like Countingup make it easy to sign up for a business current account online from the comfort of your home in minutes. Usually, applicants only need to provide their name, proof of address, a photo of their passport or other ID, and a selfie. As long as you have this information on you, you can even sign up for a Countingup business account when you’re on the go.

The Countingup app comes with free accounting software to help you manage your finances with ease. You’ll receive insights about pending invoices, your cash flow, taxes, and profits to help you run your business efficiently. Find out more here