Freelancing can be a really great gig, but it can be super tough at times too. Between managing your schedule, maintaining client relationships, going after new business, and chasing payments, it can often feel impossible to find time to do any work. “There are plenty of hours in the day”, said no freelancer ever.

It’s hardly surprising that the idea of setting up a separate bank account just for the business can seem like a right royal pain, but it can actually make things easier in the long run.

In fact, depending on how you set up your business, it might even be a legal requirement.

In this article, we explain when a separate business bank account becomes a legal obligation, and why most accountants recommend it anyway.

Does a limited company need a separate bank account?

If you operate your business as a limited company then yes, you will need a separate bank account. Your limited company is a totally separate legal entity, even if you’re the only owner and director, so keeping the finances separate is a requirement.

This distinction can sometimes be a deciding factor for start-ups when choosing a legal structure for their business. Because the company has its own legal and financial identity, any debts belong to the business, so there’s less risk to your own individual assets if things go wrong.

That’s why, as a limited company, it’s a legal requirement to set up a business bank account for your company which is independent of your own personal banking.

Are you set up as a sole trader?

Unlike limited companies, having a separate bank account is not a legal requirement for sole traders. Where the owner of a limited company is treated as a separate legal entity from their business, a sole trader is not.

This means that your personal and professional finances are inextricable in the eyes of tax and the law. Unfortunately, this also means you’re personally liable if the business hits any financial hurdles, putting your own money and personal assets at risk.

But although it’s not a legal requirement for sole traders to have a separate business bank account, there are plenty of good reasons for doing so anyway.

The pros and cons of having a separate bank account

Keeping your accounts separate is generally considered best practice for businesses. It makes it easier to track and manage the finances, so your accounts are more likely to be accurate, and there’s less risk of any errors creeping in.

Has all this got you thinking? Let us walk you through some of the benefits of setting up a bank account just for your business.

Having a separate bank account can make bookkeeping easier and more accurate

When your financial accounts are kept separate, keeping the books up to date is much more straightforward. With an independent business bank account, you can link it straight to your bookkeeping software without your personal finances getting dragged in too.

Your bookkeeping will automatically populate with your bank transactions, helping you stay up to date with much less effort.

Better bookkeeping is the secret to running a successful business. You’ll be able to keep an eye on the finances, follow up late payments, and stay more tax efficient. It even makes it easier to spot all those business expenses that you can offset against your tax bill.

Simpler tax returns

When it comes to tax return time, whether you’re filing a Self Assessment as a sole trader or a Company Tax Return as a limited company, separate bank accounts are a blessing.

You won’t need to pick through every single transaction to decipher what was personal and what was business-related. Your tax returns will be more accurate and therefore less at risk of penalties.

Credibility

Having a business account means you can make and take payments through a separate bank. This will boost your reputation in the eyes of your clients and suppliers, making your business appear more established than it might be.

Complying with some banks

Some banks insist that you have a separate business bank account, so it’s worthwhile getting one set up to eliminate any stumbling blocks for yourself further down the line.

Better budgeting boundaries

When you divide your personal and business finances, you’ll have a clearer picture of what’s what. Keeping your personal budget as a separate pot away from your business will help you protect cash flow and savings in both areas of your life.

Protecting your business credit score

Having a healthy business credit score is crucial for things like loans and investments. If your personal credit score isn’t so great and your finances are combined, this won’t stand your business in great stead.

More flexible transactions

Money is often constantly moving through business bank accounts and with personal accounts, there are typically tighter restrictions on things like withdrawals and transfers. Opening a business bank account will give you the financial freedom you need to operate your business efficiently.

Physical bank card separation

Another great benefit of separate bank accounts is different bank cards so that you can keep your personal and professional spending physically divided to avoid confusion. This is particularly important if you ever employ any staff who have access to bank cards too.

Whilst setting up a separate bank account might seem like extra effort, it’s fair to say that the benefits far outweigh any inconvenience. In fact, you could even choose to use the same bank for both sets of finances.

Some banks offer special access to interest rates or lending facilities not available to other customers, and you’ll be able access your accounts through the same banking app. In today’s scroll-savvy digital age, that could be particularly welcome.

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