Business bank accounts

Do I need a business bank account?

Over four million people are currently self-employed, freelancing, contracting, or engaged in the gig economy, either as their primary occupation or as a side job. Although many can manage with their personal bank accounts, there are occasions when having a business account becomes necessary or when it is simply more convenient to keep finances separate.

This guide represents a bit of a shift for us, as we typically focus on being a consumer ExEconomics site dedicated to defending you against businesses that overcharge and exploit you. However, for the approximately four million people who are self-employed, the lines between business and consumer often blur, creating a somewhat ambiguous situation.

What is a business bank account?

A business bank account, at its core, isn’t much different from a personal bank account. The main distinction is that it’s designated exclusively for managing your business’s financial transactions.

However, business accounts can vary significantly. While some are straightforward, focusing simply on depositing and withdrawing funds, others offer advanced features such as invoicing, payroll processing (for businesses with employees), and tools to assist with accounting and tax filing. No matter what you need, there’s likely an account tailored to fit those requirements.

Many people are interested in finding no-cost business banking options, though truly free accounts are rare—especially when compared to personal banking. In the upcoming sections of this guide, we’ll explore some of the best options available, including more affordable business bank accounts.

Who needs to open a business bank account?

There’s a clear distinction to be made here, primarily concerning whether your business operates as a separate legal entity from yourself, in addition to its size. So…

You NEED a business bank account if…

+ You’ve established your business as a limited company in the UK by registering it with Companies House. As a result, your business operates as a distinct legal entity from yourself, meaning you should avoid using your personal account for its financial transactions.

+ Your yearly revenue has grown to a point where managing your business through regular banking methods may become challenging. Although there’s no official threshold, having a dedicated business account could streamline daily operations like monitoring cash flow and arranging standing orders.

You don’t NEED a business bank account if…

– You’re a sole trader or freelancer, or contracting (but not through a limited company), eg, hairdresser, research interviewer, journalist, TV producer, gardener, designer, developer.

– You’re doing gig work, like Uber, TaskRabbit or Deliveroo.

In certain situations, opening a business account is not mandatory because, legally speaking, your business is not distinct from yourself. This applies to freelancers, sole traders, and gig workers, where the law (and the tax authorities) view you and your business as one entity.

Nevertheless, even if you think a business account isn’t necessary, you might find it beneficial to have one. Managing a separate account for your business can simplify tracking income and expenses, especially if your self-employment earnings constitute the majority of your total income.

As a general guideline, if you’re deducting business-related expenses (like travel, phone bills, or office supplies) from your income, it’s advisable to consider setting up a separate business account.

Best business bank accounts – which should I go for?

In this article, we explore the top business bank accounts tailored for startups, sole traders, company directors, and even larger SMEs (small and medium enterprises). Your choice will hinge on the specific features and services you require from the account.

• Mostly get paid by bank transfers and / or want an account that integrates with accounting software?
  or
• Need an account that will let you process a lot of cash and cheque transactions?

Don’t need a branch

Won’t need to pay in cash / cheques often?

Exploring the new generation of fintechs that provide business accounts is a promising start. These modern banks offer a quicker setup and significantly lower costs compared to traditional high-street banks. You can open an account within minutes and enjoy a user-friendly interface to monitor your income and expenditures, with seamless integration into accounting software.

The business accounts mentioned below allow you to attach photo receipts to transactions, which can be useful for substantiating expenses to HMRC if necessary. Additionally, you can establish linked accounts specifically for tax purposes, creating separate ‘pots’ to save for your tax liabilities. Generally, account management is conducted through a mobile app, although some providers offer limited online banking options.

Top digital business bank accounts

(1) Online accounting software helps you prepare your tax return by helping you categorise spending. Big players include Xero, Quickbooks and FreeAgent.

Need a branch

Need to be able to deposit or withdraw large amounts of cash / cheques?

You might find the accounts mentioned above useful; for instance, Starling allows you to scan cheques up to £500 or mail in cheques if the amount is higher. However, if you plan to deposit or withdraw cash frequently, especially for till floats, opting for a traditional high street bank could be more advantageous.

In such cases, select a bank with a nearby branch, as using the Post Office for cash or cheque transactions often incurs additional fees. Many high street banks offer introductory promotions, such as a year or two of free banking or complimentary accounting software, although you may still face charges for cash deposits or ATM withdrawals.

It’s important to review the fees that will apply after the introductory period ends, as monthly charges for these accounts can be significant (though these can generally be claimed as business expenses against your profits). Here’s an overview of the potential fees, though specifics may vary by bank:

• Monthly fee: £6
• Cash deposit/withdrawal fee: £0.70 per £100
• Transfer fee in/out: £0.30
• Cheques in/out fee: £0.50

Like the fintechs, most high-street banks – though not all, so check – let you sync your account with accounting software like FreeAgent, QuickBooks or Xero.

Accounts for bad credit

Can I get a business bank account if I have bad credit?

Certainly, you can open an account even if you’ve had past credit issues. While major high street banks may not approve you, there are alternative options available through online or app-based providers. For instance, Zempler Bank* offers a business account that guarantees approval as long as you provide the required identification. There are no monthly charges, although a one-time card issuance fee of £9.95 applies.

What do you need to get a UK business bank account?

Whether you’re launching a new venture or have been operating for some time, you’ll need to fulfill certain requirements and provide specific documentation to open a bank account with a UK institution. The precise criteria can differ based on the nature of your business and the particular bank you select.

Nonetheless, generally speaking, you will be required to supply…

• Evidence that you’re a UK resident
• Details of your UK business, such as the trading address, turnover and Companies House registration number (if you have one), plus tax and VAT registration details
• Photo ID, such as a driving licence or passport
• Proof of address, such as a utility bill or mortgage statement

For tailored guidance on what you might need to open a business bank account, you can use trade body UK Finance’s online ‘Prepare to apply’ tool. If you’re still unsure, check with your chosen bank to see what they need to be able to open a business account for you.

Pros & cons of keeping business and personal finances separate

Business accounts operate in much the same way as personal accounts, allowing you to arrange payments, receive funds, and perform transactions with a debit card. Establishing a distinct account offers numerous advantages, although it does come with a few drawbacks.

+ You save on admin and time (in one sense, see the second ‘con’ below). Maintaining a clear separation between your business income and expenses simplifies the process of filing your tax return with HMRC. By keeping all relevant information and figures in a single business account, you avoid the hassle of determining whether a particular expenditure, like a fancy dinner, was a business-related meeting or a personal outing with friends.

Moreover, this separation proves beneficial in the event of an HMRC audit. Should they examine your business finances, everything will be neatly organized and distinct from your personal finances, preventing the need for them to delve into your personal financial details.

+ You build a credit rating for your business. To increase your chances of securing a business loan or credit card in the future, it’s wise to start building a credit history for your business now. This can be achieved by effectively managing a dedicated business account. Relying solely on a personal account might result in ineligibility for business financial products.

+ You don’t break your bank’s terms and conditions. The extensive fine print associated with your personal bank account generally specifies that it’s not intended for business use. While you might not face issues if you’re a freelance writer receiving payments into this account, things could be different if you run a food truck and handle numerous cash transactions. In such cases, your bank may either shut down your personal account or require you to open a dedicated business account.

– They may well cost you in fees, whereas it’s easy to get a free personal account. A number of banks continue to levy monthly fees of approximately £5 on their business accounts, although some digital banks offer accounts without these charges. Depending on your account’s specific tariff, you may also incur fees for cash deposits and withdrawals, and occasionally for other types of transactions.

– You’ve two accounts, so it’s twice the admin. You’ll have to manage additional cards, statements, and passwords. However, as mentioned earlier, the goal is to handle the administrative tasks now so you can save yourself from extra work when it comes time to file your tax return.

If you’ve decided to go for it, read on. If you just want a personal account, read our Best Bank Accounts guide.

Business bank account FAQ

Q – Is my business bank account covered by the FSCS?

A – Funds held in your bank’s current accounts or savings products are protected by the Financial Services Compensation Scheme (FSCS), with coverage extending up to £85,000 per individual per financial institution.

The FSCS is an independent fund overseen by the FCA. It ensures that if a bank fails, you will be reimbursed for some of your money. However, you may experience a temporary loss of access to your funds while compensation is processed.

In this guide, you’ll find information about business bank account providers…

• Starling has FSCS protection.
• Monzo has FSCS protection.
• Cashplus has FSCS protection.

All of our top recommendations come with FSCS protection, but it’s important to note that not all business account providers offer this safeguard. If a provider is issuing a prepaid card, your funds will be covered under “e-money regulations,” which are less comprehensive than FSCS protection.

These regulations mandate that prepaid card providers must hold your funds in a separate ring-fenced account at a bank or building society, distinct from the provider’s own accounts. This setup means that if the prepaid card issuer faces financial difficulties, the bank or building society holding your funds will still have them safe.

However, there is a minor risk if the bank or building society itself fails, as your money would not be protected in this scenario. Therefore, if you plan to maintain substantial amounts of cash in the account for extended periods, you might find it more reassuring to use a traditional bank.

For detailed information, check out the our FSCS £85,000 savings protection scheme.

Q – How does tax work if I have a business bank account?

A – When you receive payment for a job in gross terms (i.e., before tax deductions), it’s prudent to set aside the portion of that money needed for tax and national insurance in a separate account. This amount should not be considered as part of your disposable income for business expenses or personal salary. By doing this, you avoid the scramble for funds when tax payments are due.

Typically, tax payments are made in two installments: the full amount in January and a half-payment in July. However, due to the coronavirus pandemic, HMRC has suspended the July payment this year, though you will still be responsible for the full tax amount.

As a general guideline, if you are a basic-rate taxpayer, it’s advisable to reserve approximately 30% of your profit for tax and national insurance. If you fall into the higher tax rate category, set aside around 40%. To calculate your profit, subtract your expenses from your income (you can use an income tax calculator or refer to your tax rates for more precise figures).

The fintech business accounts mentioned above allow you to easily create a separate ‘pot’ specifically for your tax funds, enabling you to transfer money into it as you earn. On the other hand, if you prefer using a traditional high-street bank, you can establish a separate account for tax purposes and manually move funds as needed, though this process can be more cumbersome.

For directors of limited companies, tax matters can be more intricate, as you’ll typically deal with corporation tax rather than income tax. The specifics will vary based on whether you’re using an umbrella company or contracting directly.

No matter your business structure, if you’re not particularly adept with numbers or if you’re short on time, hiring a skilled accountant can be immensely valuable, especially during self-assessment periods.

Q – Can I complain about my business account provider?

A – Yes. Initially, you should address your complaint directly to the service provider, with the expectation that they will resolve the issue to your satisfaction. If the problem persists and you are a small business owner or sole trader, you can escalate the matter to the Financial Ombudsman. This process is similar to how you would handle a grievance related to your personal banking.

Use this list on the Financial Ombudsman’s site to check it can deal with your business banking complaint.

If the Ombudsman can’t help you as you don’t fall under its remit, then the Business Banking Resolution Service may be able to step in, though generally this will only apply to larger SMEs.