Last year the number of people working as self-employed, freelancing, contracting or part of the gig economy, reached five million. While most can use their normal bank account, there are times when you need to use a business account, or it’s much easier to separate your finances.

We’re taking a look at the pros and cons of keeping a separate account for your work related income and expenditure.

*Spoiler alert… the Pros win.*

What is a business bank account?

First of all let’s look at what makes a bank account a ‘business’ account. Simply it’s a bank account that you use solely for finance related directly to your business, ie any income received for work/goods and services and any expenditure.

For many, a simple ‘Free’* business account is all you need. BUT there are of course all singing all dancing accounts that will integrate with your accounting and bookkeeping software, help you manage payroll and issue invoices.

Who needs a business bank account?

This is easy. There are those who NEED a business account and those who could benefit from having one.

You NEED an account if your business is a separate legal entity from YOU.

If you have setup a limited company in the UK (you’ve registered it at Companies House)then you NEED a business bank account. In this case, your business is legally separate from you, so you shouldn’t be using a personal account for its expenses.

If you are a sole trader or freelancer, contracting (but not through a limited company), eg, hairdresser, research interviewer, journalist, TV producer, gardener, designer, developer you DO NOT NEED a business bank account. As far as the tax man and the law are concerned, you and your business are one and the same.

BUT whilst the tax man might not care if you pay for your weekly food shop out of the same account that you receive your business revenue into, your accountant might. It’s a lot easier to clearly see where you’ve offset the cost of travel, phone calls and stationery when we don’t have to concern ourselves with how much you’ve spent on milk, loo roll and wine.

Pros & Cons of keeping business and personal finances separate

Business accounts work in a very similar way to personal accounts – you’ll be able to set up payments, have people pay you and make debit card transactions. Setting up a separate account has a lot of positives going for it, through there are a few downsides too.

• PRO: You save on admin and time. Keeping your business income and expenses separate will help when you come to do your tax return for HMRC. The info and numbers you need are all in one account, rather than you sifting through your personal account trying to work out whether that fancy meal out was a business meeting and can be expensed, or just you and your mates heading for lunch.
  
  Furthermore, it’s also helpful if HMRC ever investigate your business finances. If they do, it’s all there, and separate, and won’t necessitate them looking into your personal finances too. By having a separate account you can simply export your transactions for the relevant period. Some accounts like Tide.co also have tools that allow you to categorise each transaction in real time, neatly allocating every expenditure to the relevant account ahead of self assessment. This makes your job and ours MUCH easier.
  
• PRO: You build a credit rating for your business. If you want to apply for a business loan or credit card further down the line, then it’s better to build up a credit history for your business now, and you can do this by managing a business account well. Keep only a personal account, and you may not be eligible for business products.
  
• PRO: You don’t break your bank’s terms and conditions. The reams of small print that comes with your personal bank account will usually say that you’re not allowed to use it as a business account. You’re unlikely to trigger this if you’re, say, a freelance writer getting earnings transferred into the account. But, if – for example – you are a food vendor and you’ll make a lot of cash transactions, then your bank will likely close your personal account, or ask you to open one of its business accounts.
  
• CON: They usually have fees.Though there’s now a new breed of digital accounts without monthly fees, most business accounts charge a monthly fee, often around £5. You’ll also usually pay for cash deposits and withdrawals, and sometimes for making other transactions.
  
• CON: You’ve two accounts, so it’s twice the admin. You’ll need to deal with more cards, more statements and more passwords. But, as we say above, the idea is that you do the admin now and save on doing more when it’s time to do your tax return.

So there you have it. Our take on Business Bank Accounts and before you ask, yes, we do have some recommendations.

Our top pick business accounts for sole traders and freelancers

All provide FSCS protection up to £85,000

• Starling – no monthly fees, spending analytics, digital receipts and more
• Monzo Lite – from £0 a month, award winning customer service
• Tide.co – no monthly fees – options to upgrade as your business grows, accountancy software integrations, expense cards for your staff available

Need more advice? Get in touch and we’ll help you choose the right account.