5 reasons why you need to separate business from personal expenses

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 one current account, which means that their personal and business expenses are mixed in together.

Although you are not legally required to open a separate business account, we highly recommend that you do. It may seem like a hassle initially, but it will help you save time, money and make better financial decisions. Here are five reasons why:

To keep a business in good financial health, cash flow management is a key. When your personal and business funds are mixed, this becomes more of a challenge.

For an insight into how your business is really doing, you will have to waste precious time cleaning up your financial data each month. This would likely involve the painful combination of data entry and spreadsheets. Mixing business and personal expenses also keeps problem areas hidden, preventing you from finding ways to improve your bottom line. 

When your personal and business expenses are mixed, bookkeeping takes longer. Trying to account for and distinguish between different types of spending is a time drain. If you are paying an accountant by the hour, this will quickly rack up costs. 

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 expenses. Memory fades and before you know it, you’ve created fertile ground for errors. As a result, you might:

• Overlook legitimate tax deductions 
• Mistake personal expenses for business costs, leading to penalties from HMRC if you are audited. 

Many sole traders and self-employed people throw out receipts shortly after claiming them as expenses, unaware that HMRC has rules around storing records. This could land you in hot water if you are audited later down the line. 

How long should you keep business expense receipts for? 

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

However, printed receipts are easy to lose. And if your business has lots of expenses (like any), six years worth of records is a great deal of paperwork. 

To effortlessly keep an organised record of their business expenses, thousands of sole traders and self-employed people use the Countingup business account and app. It automatically categorises business expenses, and nudges you to snap your receipts as soon as you’ve bought something. This removes the pain of updating spreadsheets and making sense of receipt collections. 

As HMRC rules that small businesses must start filing VAT digitally by 2023, you’ll be setting yourself up for a smooth transition in the months to come. 

Many small business owners prefer to use their personal account for business to avoid costly current account fees. However, they can easily save themselves time and money with a dual-purpose business account like Countingup, which makes financial admin easier, faster and cheaper. 

As your company grows, problems you haven’t addressed early on are likely to grow too. Mixing personal and business finances creates obstacles in areas from cash flow management to compliance and affects your bottom line. 

The solution is to keep your business and personal funds separate from the start. With Countingup, you can open your business account for free in a matter of minutes from the comfort of your home. All you need is your phone and some ID.

Find out how effortless keeping on top of your business finances can be – get started free with Countingup today