A Beginner's Guide to Business Bank Accounts in the UK
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What is a business bank account?
A business bank account is a current account designed for businesses, including sole traders, limited companies, partnerships and not-for-profit organisations.
The main difference between a business bank account and personal bank account is who the money belongs to. This has important tax implications.
If you’re a sole trader, you and your business are the same – your business income is your income, so you’ll have to pay income tax on it.
But if you run a limited company, your company is legally separate from you. This means your company's income is taxed differently and separately from the money you ‘receive’ or pay yourself as income or dividends from the business.
As limited liability partnerships (LLPs) are also separate legal entities, they should have business bank accounts separate from their partners’ finances.
How does a business bank account work?
Business bank accounts work in a similar way to personal current accounts. You can deposit and withdraw money, receive incoming payments, use a debit card to pay for goods online or in person, and set up standing orders and direct debits.
Certain business accounts have extra features, such as invoicing, payment cards for other employees and integration with accounting software.
You can manage a business bank account online, over the phone, via an app or in a branch, depending on the provider and the type of account you choose.
How to open a business bank account
To open a business bank account, you can usually apply in one of the following ways:
In a branch: talk in person with a member of staff before applying.
Pros: You can discuss your options with a staff member.
Cons: It depends whether there is a branch near you. What’s more, some providers are digital-only so it would be impossible to apply in a branch.
Online via the provider’s website: apply from anywhere, and you could open an account in minutes.
Pros: You do not need to travel to a specific location to set up an account.
Cons: You need an internet connection and a device such as a laptop or smartphone to apply online.
Through a provider’s mobile app: set up mobile banking and manage your account on your phone as soon as it’s open without having to wait for your card and account details in the post.
Pros: Opening an account from your phone may be less hassle than waiting in line in a branch – it can be done from the comfort of your own home.
Cons: It could be more difficult to open an account on a mobile phone if you struggle with technology and prefer to do your banking in person.
Who can open a business bank account?
Sole traders can open a business bank account. Providers may offer you a specific sole trader account or a standard business account.
If you run a limited company or a limited liability partnership, no matter its size, you are likely to be able to open a business bank account.
Charities, clubs and societies may be able to open a business account. Eligibility is likely to vary between providers so it’s worth shopping around if you’re looking to open a bank account for a not-for-profit organisation.
Some business bank accounts have strict eligibility criteria, such as minimum or maximum turnover or trading history. Providers may also have restrictions on which business structures and industries can open an account, so it’s a good idea to look through the terms of an account to make sure you’re eligible before applying.
What is required to open a business bank account?
To open a business account, you’ll need to show proof of your identity and give the name and UK-based address of your business. Providers may also need other information, such as your industry, how many employees you have and your estimated annual turnover.
» MORE: How do I open a business bank account in the UK?
How long does it take to open a business bank account?
It can take anything from just a few minutes to a few weeks to open a business current account. It depends on the provider you apply to, and how long it takes to complete its checks.
Types of business bank accounts
There is a range of different business bank accounts available, including current accounts and savings accounts. What’s more, you can choose to bank online or instead opt for a bank with a high street presence.
Business current account
Limited companies and limited liability partnerships (LLPs) should open a business current account to manage their money and keep business and personal funds separate.
This is because your business is a separate legal entity to you, so you have a duty to keep its finances away from your own. One of the ways to do this is using a business bank account.
Not-for-profit organisations such as charities may find it useful to have a separate business account to manage their finances and keep accurate records of income and expenditure.
Sole traders can also open business bank accounts, though it’s not a requirement.
Business current accounts operate in a similar way to personal current accounts. Generally, you can withdraw or deposit cash and make payments using a debit card, whether you’re shopping online or in store. You can also accept incoming payments, transfer money to others, and set up standing orders or direct debits.
Business savings account
If your business is turning a profit, you may consider saving some of this money for the future. You could benefit from keeping the funds in a business savings account.
A business savings account lets you put aside spare cash and store it for a later date, while earning interest on it. There are different types of business savings account:
Easy access: There are few or no restrictions on when you can deposit or withdraw money.
Notice: You must give the bank notice before you want to withdraw money (accounts have different notice periods you can choose from).
Fixed rate: You ‘lock away’ your money for a certain amount of time and get a fixed interest rate for the whole term.
Which savings account you get depends on your specific circumstances. If you’re unsure, it’s worth talking to a financial adviser or asking your bank for more information.
» MORE: Business savings accounts guide
Online business accounts
If you like to manage your money on the go, via an app or through internet banking, you may want to consider an online business account.
You can get a business bank account which can be managed largely or solely online. This includes accounts from challenger banks or digital-only providers, as well as traditional banks which have diversified their offering.
If you prefer to bank in a branch, an online business account may not suit you.
» MORE: How to open a business bank account online
Free business bank accounts
Whether you are launching a start up or you’re keen to reduce your business outgoings, you may want to look for a free business bank account.
Some business bank accounts are described as ‘free’. This usually means that you don’t have to pay a monthly fee, but you may have to pay for other services and per transaction instead. Or, it could mean that there is an introductory offer where you don’t pay for everyday services for a period of time.
You may be able to choose between a free or paid version of a business bank account, each with different features or a separate pricing structure. You could compare these to see which is more suitable for your business needs.
You should check the terms of your business account to find out more about ‘free’ business banking and what fees a provider may charge, if any.
» MORE: Explore free business accounts
Merchant account
If you sell goods and take payments online, by phone or in person using debit or credit cards, you may need a merchant account.
A merchant account manages incoming transactions made by debit or credit card. This can be set up with a payment processing service.
With a merchant account, transactions are processed and any fees for using a card terminal or other processing system are deducted before you receive the money.
You’ll then receive the money into your business bank account.
A merchant account is different from a business current account. To receive payments, you need one of each.
Do I need a business bank account?
Whether you are a sole trader, freelancer, a contractor, running a limited company or in a partnership, you’ll need to keep your finances organised. One way to make this easier is to open a separate bank account for your business.
With a business account, you’ll keep work transactions separate from your personal money so it may be easier to do your accounting and tax returns. And by managing a business account, you will build a business credit score for your business, which will be useful in future if you need to take out a business loan or get a company credit card.
Pros
- You can build a credit score for your business.
- You will be able to keep your business finances separate from your personal finances.
- It looks more professional – some clients may want to send money to a business account rather than a personal account.
Cons
- It is another bank account to keep track of.
- There may be charges for actions that may be free with a personal account.
Business account vs. personal account
Personal and business accounts have similar features, and can both be used for everyday transactions such as transferring money and paying bills.
However, business accounts should only be used for business transactions. Likewise, personal accounts are generally not designed for business use.
We look at the similarities and differences, and consider the pros and cons of each.
Similarities between business and personal accounts
Business accounts and personal accounts have similar features, so you can use a business bank account as you would use a personal current account.
This means you can use it for your day-to-day banking needs, such as making transfers, setting up direct debits, and paying for goods in store or online.
Differences between business and personal accounts
The difference between the two is that a business account is set up for your business – it shouldn’t be used for personal transactions. Likewise, you should not use your personal account for business-related activities, unless you are a sole trader.
Mixing up the two means that it is more difficult to keep your business and personal finances separate, something you are required to do if you run a limited company. It can also be a good idea to keep these separate if you’re a sole trader, as it can help you organise your transactions when it comes to filling in your self-assessment tax return.
Pros of using a personal account
- Ease: For sole traders, all your money is in one place.
- Familiarity: If you use the same account for both sole trader and personal transactions, you’re already used to how it works.
Cons of using a personal account
- It’s often against the bank’s terms and conditions to use a personal account for business: your provider could close your account if you do.
- Limited companies cannot use a personal account: your business is legally a separate entity to you, so you need a business account.
Traditional business account vs. online business account
Would you prefer to open a business bank account at a traditional bank with branches on high streets around the UK? Or would you be happy with an online-only account?
There are advantages and disadvantages to each option. For example, some online business account providers offer useful extras, such as tools to help you categorise your transactions, keep track of staff expenses and put money aside for your tax bill. However, if you want to deposit cash or cheques, or negotiate an overdraft, you might find it easier at a high street bank.
With so many options available, it’s important to take the time to decide what you need, use online research tools like our comparison service, and weigh up the pros and cons of the different accounts.
|
Day-day banking |
Internet or mobile banking |
Customer support |
Set up time |
| Online business account |
May be more suited to online transfers. Some do not offer cash or cheque services |
You can open an account and do your everday banking on your phone. |
Unlikely to offer in-person support but online support (such as web chat) could be 24/7. |
May be set up same day. You could start using the account instantly via an app. |
| Traditional business account |
May be able to pay in cash or cheques in a branch. |
You may be able to open an account online or in a branch. |
Can offer in-person support as well as online or over the phone |
May take longer to set up an account than via an online provider. |
|
Similarities between online and traditional business accounts
Everyday banking: You can use them for your day-to-day banking, including transfers, standing orders, direct debits and card payments.
Multi-platform access: Traditional high street banks may also have internet and mobile banking, so you can manage your account online too.
Differences between online and traditional business accounts
Customer support: Traditional high street banks have branches where you can go in to manage your account or ask for help, while online accounts offer support digitally or over the phone instead.
Set up time: Online business bank accounts may take less time to set up than traditional bank accounts, though this is not guaranteed – it depends on your provider and individual circumstances.
