Do I need a business bank account?

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Five million of us are now self-employed, freelancing, contracting or part of the gig economy, whether that's as our main job or a side hustle. 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.

Doing this guide is a bit of a departure for us. We're a consumer MoneySaving site, here to fight your corner against businesses overcharging and taking advantage of you. But for many of the five million who are self-employed, the business and the consumer are often one and the same, so it's a bit of a grey area.

This guide is part of what we hope will be a new series of helpful self-employment articles, so please let us know if you found this guide helpful, if anything was missing, or any other topics you'd find it helpful for us to cover.

In this guide

What is a business bank account?

There's nothing really special about it, at its basic level it's just like your personal bank account, but it's one you open solely for your business income and expenditure.

But a business account can range from that very simple money-in, money-out account to an account that helps you issue invoices, run payroll (if you employ others) and help with your accounting and tax return. Whatever you need it to do, there'll be an account out there to help.

Many are looking for free business banking, though that doesn't really exist - not in the same way it does for personal bank accounts anyway. However, we run through the best buys, including which accounts are the cheapest.

Who needs to open a business bank account?

There's a pretty easy line here and it relates to whether your business is legally separate from you. So...

You NEED a business bank account if...

  • You've set your business up as a limited company in the UK (ie, you've registered it at Companies House). In this case, your business is legally separate from you, so you shouldn't be using a personal account for its expenses.

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.

You're not required to open a business account in these cases, as your business or your self-employment isn't legally separate from you. As a freelancer, sole trader or gig worker, you and your business are one and the same in the eyes of the law – and the taxman!

However, even if you're in the "I don't need one" camp, you may want to open one anyway, as sometimes it's easier to have one than to try and juggle your business's income and expenditure with your own, especially if your self-employment income is the lion's share of your total income.

As a rule of thumb, if you're offsetting business expenses (eg, travel tickets, phone calls or stationery) against your income, then you really should be looking for a separate business account.

Pros (and a couple of 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...

  • PRO: You save on admin and time (in one sense, see the second 'con' below). 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 posh restaurant meal was a business meeting and can be expensed, or you and your mates heading for brunch.

    Drawing this out further, 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.

  • 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 own a food truck 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 may well cost you in fees, whereas it's easy to get a free personal account. 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.

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

Best business bank accounts – which should I go for?

This depends on what you need to do with it. Do you just need to separate your personal and business expenses? Are you looking for a bank that can work with your bookkeeping or accounting software? Or do you need an account that will let you process a lot of cash and cheque transactions?

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

The new wave of fintechs offering business accounts is a good place to start, as they're easier to set up and much cheaper than their high-street counterparts. These banks let you set up an account within minutes, and offer an easy way to keep track of your income and expenses, integrating seamlessly with accounting software:

Bank Fees Links to accounting software? (1) Photo receipts? (2) Set up linked account for tax? (3) FSCS Protection?
Starling* - 3% of cash deposited, min £3 (Post Office only)
- 50p per cash withdrawal at Post Office; ATM is free
Yes, Quickbooks, Xero and FreeAgent Yes Yes Yes, up to £85,000
Coconut - £1 per cash withdrawal
- £1 to deposit cash (Post Office only)
No, but it offers bookkeeping and accountant access Yes Yes No, small risk
Tide* - 20p per bank transfer
- £1 per cash withdrawal
- £1 (Post Office) or 3% of deposited cash (Paypoint)
Yes, see list Yes Yes No, small risk
(1) Online accounting software helps you prepare your tax return by helping you categorise spending. Big players include Xero, Quickbooks and FreeAgent. (2) When you spend, you can take a photo of a receipt and attach it to a transaction. Again, this helps you prove expenses (if needed) to HMRC. (3) These accounts let you set up a separate 'pot' so you can save for your tax bill.
Need to be able to deposit or withdraw lots of cash or cheques?

You may be able to use the accounts above, for example, you can scan cheques of up to £500 with Starling, or post cheques to it if higher value (Coconut & Tide don't allow this). However, you may be better using a high street bank, doubly so if you'll regularly be paying in cash (or taking it out for a till float).

If this is the case, choose a bank that has a branch near you, as many banks charge extra if you use the Post Office to pay cash or cheques in. Many high street banks have introductory offers, giving you a year or two's banking free of monthly charges, or free accounting software, though you may still need to pay for things like cash deposits or ATM withdrawals.

It's worth checking what fees will be once the intro period ends, as monthly fees for these accounts can be quite hefty (though you should be able to offset these against your profits as they're a business expense). These are the levels of fees you could expect, though it'll 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.

If these are the right accounts for you, check these comparisons:

MoneySupermarket business bank account comparison

Moneyfacts business bank account comparison

We've linked to others' comparisons for now, but let us know in the forum if it would be useful for us to do a full comparison of high-street business accounts.

What ID do I need to open a business bank account?

If you're a sole trader or freelancer, it's very similar to opening a personal account. You'll need some photo ID (driving licence or passport) and proof of address (usually a utility bill or mortgage statement).

If you're a limited company, you'll need the above, plus details of your company's registration at Companies House. You'll also likely need your tax and VAT registration details.

If you're unsure, check with your chosen business account provider as to what documents and information it requires to open your account.

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

Yes, you can. There are providers which will let you open an account if you've had credit problems in the past, though you're unlikely to be accepted by the big, high street banks. 

Instead, you're looking at online or app-based providers. For example, Cashplus Business* account guarantees approval if you have the correct ID. It charges a £69 a year fee for the account (use this link if you're switching bank account to Cashplus*). 

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

Once you're paid for a job, if you're paid gross (without tax taken off) then it's good practice to save the amount you'll need to pay in tax and national insurance in a separate account,  as it's not part of the money you have available to spend, whether that's on business expenses, or to pay yourself a 'salary'.

You're also then not scrabbling around for the cash when the tax falls due. Usually you pay what you owe in January and half in July, though due to the coronavirus, HMRC's made an exception this year, and there's no payment due in July, though you will still be liable for the entire tax bill.

As a rule of thumb, if you're a basic-rate taxpayer, you should be putting around 30% of your profit aside for tax and national insurance, or around 40% if you're paying higher-rate tax (use our income tax calculator or check your tax rates). Your profit's worked out as your income minus your expenses.

All the fintech business accounts above let you easily set up a separate 'pot' for your tax bill cash, where you can transfer money in as you go. Coconut even estimates the amount you'll owe in tax based on how much is coming in to and going out of your account. If you've chosen the high-street bank route, you should be able to set up a separate account for tax and move money across, though often this will be a lot more of a manual process.

If you're a director of your own limited company, your tax affairs will be a little more complex as you'll often be paying corporation tax rather than income tax. How it works for you in practice will depend on whether you're using an umbrella company or you're directly contracting.

Regardless of your company set-up, if you're not a numbers whizz, or you're time-poor, a good accountant can be worth their weight in gold, especially when it comes to self-assessment time.

Is money in my business bank account covered by the FSCS?

Money you hold in bank current accounts or savings products are covered by the Financial Services Compensation Scheme (FSCS), up to a limit of £85,000 per person, per financial institution.

This is an independent fund regulated by the FCA, which promises that, in the event of a bank collapsing, you get some of your money back, though it's likely you'll lose access to the cash while compensation is being dished out.

In this guide, Starling has this protection. Coconut and Tide are covered by a different protection. They are not banks, but they partner with prepaid card providers, and you're covered by the e-money regulations.

These require prepaid card providers to deposit customers' cash in a bank or building society's ring-fenced account, separate from the card provider's account. So if the prepaid card company goes bust, the bank or building society where your money's resting will still retain your cash.

The slight risk comes if the bank or building society goes bust, because your cash is NOT protected in this case. So if you're planning to keep large amounts of cash in the account for long periods, you may feel safer with a bank. For full information, read more on the FSCS £85,000 savings protection scheme.

For lots more help and information on owning and running your own business, see the Small Business forum board.

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