Should I Just Use My Personal Bank Account As A Sole Trader?
More people than ever are deciding to start their own business, with 2020 on track to be a record year for new business registrations. For sole traders, who make up nearly 60% of UK’s SMEs, one of the first questions to answer is ‘Can I use my personal account as a sole trader?’.
The answer is a bit complicated. There is no legal requirement for a sole trader to have their own business bank account, but there are a lot of advantages to having one. In this article, we’ll outline some of those key benefits to help you decide what’s best for your money.
What’s the difference between a personal account and a business account for sole traders?
One of the main reasons many entrepreneurs start as a sole trader is simplicity. In theory, and according to HMRC, you are your business. That means your personal and your businesses income can be treated as one. This allows you to use your personal bank account for business transactions, which is why three quarters of self-employed workers use personal accounts for business finances.
If you’re just getting started, the idea of paying for a new business account might seem like an unnecessary luxury, especially if you’re unsure how your new venture is going to pan out. However, while this ‘all-in-one-approach’ can seem like the easy option, in the long term it leads to stress, wasted time and limited options for the future of your business.
Some banks won’t even let you run a business account from your current account, especially if you process a large number of transactions each month. In addition, managing everything in your business and personal life from one account can actually end up losing you time and money due to having to separate your transactions manually.
The ultimate reason why sole traders should think twice before using their personal account for their business is that personal accounts are designed to be just that – personal. Business accounts give you more flexibility, tools and support to grow your business. So let’s examine how a business account can help empower you, as well as how you can make the right choice.
Why should sole traders use a business account?
Even though sole traders can use their personal account for their business, a specific account for trading purposes brings a range of benefits, from the practical to the personal.
Firstly, a business account simplifies the management of your finances. Working from a personal account combines all your transactions in one place, making it difficult to track what money belongs where.
Apart from time wasted separating line items, confusing personal and business money can also have serious financial and legal repercussions. By using a separate business bank account, you have a better idea of the profit or loss being made, helping you set money aside to pay the tax on the business profits and reducing the risk of spending it elsewhere. For the same reasons, If you end up running more than one self-employed business, you can use a separate business account for each one.
Next, there is the issue of getting paid. Just as the terms and conditions of a personal bank account may prevent it from being used for a business, if you’re using a different business name and receiving cheques in that name, it might not be possible to pay them into a personal bank account. Similarly, if you want to accept credit card or debit card payments your personal bank account is unlikely to be able to handle those. With debit cards predicted to make up 50% of payments by 2024, a business account is a strong long term investment.
One of the most confusing aspects for sole traders to get their heads around is tax and recordkeeping. If you’re self-employed you can claim tax back on certain expenses, provided they’re allowable. Separating personal from business transactions simplifies your bookkeeping process, helping you capture all your business income plus the expenses you’re able to deduct so you pay the right amount of tax.
Finally, a business account can also make it easier to secure finance when you need to grow your business or cover a financial shortfall. Most lenders won’t consider you for business finance if they only have personal account information, while having a business account also enables you to build up a robust credit history to improve your chances of being accepted for a loan.
How to choose the right business account for sole traders?
When it comes to choosing the right business account as a sole trader, there are several factors to bear in mind, including pricing, features and flexibility.
While most business accounts include some kind of monthly cost, many banks offer waivers for new accounts. However, you should also be wary of the cost of transactions, which can easily outstrip the cost of your account. Make sure you understand any standing or transaction charges that might apply to your business account after any initial ‘free’ periods are over.
Sole traders wishing to streamline their financial life should also consider online business accounts which integrate with other business software. For example, with online accounting software, you can often link up your bank account to automatically pull over transactions, saving you, or your accountant, considerable time on your bookkeeping.
Online accounts also tend to offer lower fees on transfers and withdrawals, designed with sole traders in mind and can be set up easily online in a few minutes. You can also use an online account to optimise your business for payments. Look for an option that can accept multiple kinds of payment, including bank and wire transfer, major credit and debit cards and alternative methods. You will also need to be able to make payments. For international business make sure you’re getting the best rates possible before you choose a sole trader business business account.
Making it official
When it comes to building your own business, choosing a sole trader business account might be the last thing on your mind, but making the right choice early on sets you up for success.
SafenNetpPay’s online-only business bank account was built with sole traders in mind for maximum flexibility, fair fees and complete visibility. To find out more about how you can pay and get paid more easily, take a look at our available accounts today.