Does a Sole Trader Need a Business Bank Account?

business bank account

As a sole trader, you don’t have to run a separate business bank account, but it’s probably a very good idea to do so. Transacting paid invoices through a personal bank account and paying business related bill from a personal bank account doesn’t look so great from the tax authority’s perspective. What if HMRC were to query something about your tax and wanted inspect your business accounts (and believe me this is not so unusual), a separate business bank account would immediately convey a better image than if you’re running your business through a personal bank account.

Transparency is of the essence when it comes to business transactions and accounts, you should be able to relate everything to everything else, so if you say your income was such and such and your expenses “X” then without extreme forensic auditing your bank statements ought to demonstrate the information you filed with HMRC. In addition, it is just so much more professional, efficient, and tidier to keep a separate business bank account.

When sole traders don’t run a business bank account, as an accountant, it really brings home to me how the business is not separate from the individual with the sole trader business model. It worries me, because that means the liability of the business falls on the individual, which to my way of thinking is not a particularly desirable predicament.

Other reasons why it is better to run a separate business account are:

  • Some bank account holders are in breach of their contract with the bank, either knowingly or unknowingly, because some banks prohibit use of a personal bank account for business purposes.
  • Why don’t you have a business name, is it wise to trade as “your name”?
  • Bookkeeping is made much easier if all transactions on bank statements relate to the business.
  • For tax purposes, it is more transparent, so from a legal point of view business expenses are kept separate from personal expenses.
  • Some business bank account providers provide useful online data that shows you in relation to your balance your profit or loss over the last few years.
  • A balance can always be left in the business account ready to pay tax.
  • Running a business bank account and paying money into a personal account demonstrates a disciplined mentality; it should ensure you are aware of what you are spending or what you are “paying yourself” from the business.

If you run more than one business, it is better to run separate bank accounts for each business, in fact, you definitely should keep income from each business separate even though this is not actually a legal requirement.

We encourage our sole trader clients to consider operating through a limited company because there are real advantages to doing so in terms of tax liability, but also in terms of limited liability, which is separate from the owner of the business, the business’s reputation, and building up your client base, attracting investment and finance.

As the limited company is a separate legal entity from the owner or director(s) of the company, it makes sense that a limited company should operate a separate business bank account. The rules for incorporated businesses are much stricter than for sole trader businesses, but whichever business model or legal entity you choose, not running a separate business bank account can dump you in hot water legally and with HMRC. Personally, I think every company should run a separate business bank account in its own name.

Sole Trader bank account

Once you’re set up as a sole trader and have registered with HMRC, you can open a business bank account using your own name if you like “Rosa North” and then you can add “Trading as (T/a)”, e.g. “Green Hill Cosmetics”. This looks much better on your invoice in my view, it indicates to me that you’re running a proper business account in your own name, and with that it would suggest to me that you probably do pay your taxes and are running a bone fide business. I know the accounts department at DNS prefer this for our internal security purposes and I’m sure many other business accounts departments prefer it too.

Which bank?

Open a business account wherever you think you’ll get the best deal, some banks offer twelve or even twenty-four months free business banking; other banks might offer a year’s free foreign currency account, there are a lot of offers if you look around for new business accounts.

A business bank account is a good idea for all businesses, including freelancers, sole traders, one-man bands, partnerships. See our article on difference between a sole trader and a limited company.

About the Author: Sumit Agarwal
A specialist accountant and tax adviser for freelancers, contractors and small businesses since 2005, He is an expert in business growth and development strategies. A renowned tax expert for owner managed businesses and contractors, He won the British Business Forum’s Young Entrepreneur Award in September 2012, presented at the House of Commons by MP Vrinder Sharma.