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Should I use a personal bank account for my small business?


 Some entrepreneurs use their personal bank account for business

Some entrepreneurs use their personal bank account for business

Q: Should I use a personal bank account for my small business?

A: The short answer is no – but you’re not alone if you do. We conducted a survey earlier this year and found that 63pc of sole traders are using a personal account to pay for everything. Business, pleasure, household bills and everything else in between.

This might feel like an easy option for the busy, fast-paced life of a small business owner, but it doesn’t serve you or your business very well. One bank statement. One never-ending list of transactions. It’s likely to create a financially unstable solution to managing your money because you’ll never really know where you stand.

It’s a little different if you’re operating as a limited company. While it’s not strictly a legal requirement to have a dedicated business account it’s strongly advised. As your limited company is a separate legal entity, technically its money doesn’t belong to you and so needs to be separated from your own finances.

Here are some reasons why keeping your business and personal finances separate is a good idea:

Save time and money when it comes to your tax return

If you’re self-employed you can claim tax relief on certain business expenses. To do this you need to be able to prove what your business expenses are and be sure that they’re all allowable.

Having them mixed up with your personal expenses means you’ll need to dig through your personal bank statements to identify your business purchases from a year ago, which is not only a waste of time, it’s potentially inaccurate.

We can take a simple example: which of the following transactions are business expenses?

Pret a Manger – £6.70

INT’L 00891248379 – £14.99

PayPal payment – £7.99

TFL Travel Ch – £2.49

The Post Office – £6.99

The reality is that if you’re using one account for both your personal and business expenses, it’s going to be tricky to remember what was what. But if you paid for all of these transactions using your business account because they were all strictly business-related, the answer can only be ‘All of the above’.

Having this separated out will mean filling out your self-assessment is much easier and will help to make sure no allowable business expenses go unclaimed.

> See also: What expenses can I claim through my business?

Improve your cash flow

How do you know how much money you’ve got to spend on an upcoming holiday or that new office space? It’s going to be very difficult to keep track of what money you have available for these things when you’re using the same account for both business and personal use.

If they’re separated, you’ll always know how much you have, making it easy to stay on top of your finances. And if you’re on top of your finances, you can make better decisions.

Keep HMRC happy

HMRC can audit you at any time and the more mistakes you make, the more likely it is to happen. If there’s an inconsistency in your tax return, HMRC will examine it and decide whether it’s worth investigating.

Not only does using a personal account increase the chances of getting something wrong, but if HMRC believe there is something untoward going on and decide to investigate you, all of your expenses and income on that personal bank account will be up for scrutiny.

Imagine having to explain that the £100 birthday income from your family and HMRC querying whether it was sales income.

By keeping your finances separate, you can help eliminate any doubt that you might be using your business account to pay for your personal expenses.

> See also: What to consider when changing your business bank account

Keep it professional

For most, your business is more than just a hobby, so you should treat your finances in the same way. Having a dedicated current account can make your business appear more professional and help you establish your business identity. You can use a ‘trading as’ name so that all payments are made to a business name rather than your personal name.

James Trowell is an accountant at Coconut, a business finance management tool for the self-employed.

Read more

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