You’ve probably heard the age-old platitude “A place for everything, and everything in its place.” This principle applies to more than just the holy trinity of Keys, Phone and Wallet. When it comes to running a small business, organization is King.
Nothing could be truer when applied to your business banking. Keeping your business and personal finances separate is essential if you want things to run smoothly. Opening a business bank account helps you:
● Keep track of your income and expenses
● Appear more professional
● Spot any discrepancies quickly (such as outstanding invoices or bills)
● File your Self-Assessment faster
The last point is especially important. If all your money’s in one pot, it can be much harder to determine (and prove) which income and expenses are business-related. This can lead to possible problems with HMRC - and no one needs that kind of headache. In order to avoid mix-ups, you need a dedicated bank account for your business.
In this article, we’ll clear up the fog and help you get your business banking sorted.
Who should open a business bank account?
1. Sole Traders
Though it’s not a legal requirement, it’s highly recommended that sole traders set up a separate business bank account.
Legally, there’s no difference between you and your business. As a sole trader, all your business profit is taxable to you personally. However, you’ll still want to claim sole trader business expenses - after all, they’re tax-deductible and you’re entitled. To claim business expenses, you’ll need clear records to support your claim. It’s much easier to do this if they’re not mixed up with your personal expenses.
2. Limited Company
Again, this isn’t strictly a legal requirement. However, your limited company is a separate legal entity. This means that its money does not belong to you (even though it kind of does) and should be separate from your personal finances. Whatever bank account you use for your company, it needs to be under the official business name. So while you aren’t legally obligated to open a business account, realistically, there’s not a lot of wriggle room.
Most banks have their own process of setting up a bank account for a limited company. They operate under a different set of terms and conditions different from a personal account.
If you have a limited company, you’re most likely already aware of the strict rules of taking money out of your account. You can take a salary, dividends, and claim back any expenses you paid personally, but that’s about it. Any other money taken out of your business will be treated as a director loan, with strict rules about how, and when, it needs to be paid back as well as the tax payable on the loan and repayments.
If you’re switching up:
If you’re a sole trader transitioning to a limited company, it’s worth speaking to an accountant (like us!) about the rules around payment and tax. For example, once you’re a limited company owner and paying yourself a wage, you’re personally taxed on this money. It’s highly recommended you don’t use the same bank account you operated on as a sole trader, or you might encounter some nasty tax surprises.
How to choose your business bank account
Most banks now offer business accounts. As with other financial products like mortgages, ISAs and loans, each bank will have its own rates and deals. While some of these might come with monthly fees, they’ll also have introductory offers. Shop around and compare for the best value before you commit.
If you’re not sure what you’re looking for and don’t want to waste time window-shopping bargains, don’t panic. Here are the top priority factors to examine:
1. Low fees
Ever been stung with hidden fees? With the small print getting smaller every year, it’s time to get out the magnifying lens. The majority of business bank accounts will have a monthly fee. There may also be fees for certain transactions, such as depositing cheques. Getting the low-down on everything you’re signing up for will help you determine who can offer the best value for your business (on a side note: the more upfront they are, the better).
2. Fee-free introductory period
Informally dubbed ‘the honeymoon’ period, this blissful time is when you don’t incur any service fees on your new business bank account. But when the honeymoon period ends, is it still sunshine and rainbows? Always ensure you know how much it will cost when the bank starts charging.
A great way to compare is to look at the yearly costs, rather than monthly - including the initial fee-free rate. The longer fee-free period might end up with higher long-term fees than another bank who has a shorter fee-free period, but a lower rate thereafter.
While you’re at it, check whether there’s a minimum or maximum opening deposit limit. A good bank will offer you flexibility and a decent range of choices.
3. Online banking portal
In today’s digital world, this one is virtually non-negotiable. On-the-go banking via mobile app should mean your finances can keep up with you. Your business bank of choice needs to offer an app that’s user-friendly and accessible. Having a real-time overview of your finances gives you the ability to make better financial decisions. It’s especially helpful if your business bank account can sync with your online accounting software.
4. Overdraft facility
As credit becomes a lifestyle, more and more people find themselves ‘living in their overdraft’. While nobody wants to dip into the red, having a business account with an affordable overdraft is paramount. If you ever experience any cash flow issues, this could help your business get out of a tricky financial spot. It’s worth researching how much each provider is willing to lend - as well as the fees and interest they charge.
5. Foreign transactions
If you deal with international clients - or are looking to expand your business in the future outside of the UK - you’ll need a business bank account that can process foreign currency transactions. Most will offer this service for a fee, but that’s something you’ll want to check before you sign up.
The best business bank accounts offer a wide variety of features to simplify your banking process. As much as you want to get the ball rolling, take your time and be selective. Careful research, checking fine print and asking questions will help you find your perfect match. While this might sound time-consuming, it’s worth the effort. Having a dedicated business bank account will help maintain the financial integrity of your business - and keep your books in order, too.
What do I need to open a business bank account in the UK?
While some photo ID and proof of address is usually enough to open a standard account, business accounts require more information. Before rocking up to your appointment, make sure you have the following:
- Proof of ID for all named company directors (passport, driver’s license, national ID card)
- Proof of Address (utility bill, council tax statement, bank statement)
- Full business address including postcode
- Contact details
- Companies House registration number (for limited companies/partnerships)
- Estimated annual turnover
Of course, this list might vary depending on which bank you use. Check with a bank representative in advance to ensure you bring all supporting documents along to your appointment. Otherwise you’ll have to reschedule - and as the famous meme goes, “Ain’t nobody got time for that!”
How to open a business bank account in the UK
Once you’ve decided to take the plunge and open your first business account (congratulations, by the way), it’s time to get started. After choosing your bank and getting all the paperwork together, go ahead and schedule that appointment. This can usually be done online or over the phone. As eager as you might be to get going, showing up without an appointment isn’t advisable. Very few branches allow for same-day walk-ins. Booking in advance is definitely your safest bet. Having said that, most high-street banks now allow you to start the application process online - although you might still have to meet with a representative. Some digital banks offer business accounts that can be opened online, or via video call (although you usually need to be a member of the bank to access the latter).
Sync your records
Having a business account means all your company income and outgoing are easier to track. However, you still need to log the numbers for bookkeeping reasons.
For example, at Addition, we use Xero to integrate with your business bank accounts. That way, data is automatically shared from your business account into your books - ensuring that they’re always accurate and up-to-date.
Whatever you use, make sure the software is able to interact dynamically with your business.
Want Some Help With That?
Addition offers full-suite financial services to small businesses and startups - from bookkeeping to growth funding. Our tailored plans grow with your business, eliminate the need for a full-time finance team, and give actionable insights to get you further, faster! Hop on a call and let us make it all add up!