Sole trader bank accounts

Becoming a sole trader is the quickest and easiest way to start a new business. It’s popular too, with 3.2 million sole proprietorships currently registered in the UK. But alongside growing your business and balancing your time, you’ll also need to get to grips with your finances.

While it’s possible to run your sole trader business using a personal bank account, setting up a dedicated business bank account can make life easier in lots of ways. Below we explore the benefits of keeping your finances separate and highlight what to look for when researching sole trader business bank accounts.

What is a sole trader bank account?

Sole trader bank accounts are simply business bank accounts you can manage your finances with as a sole trader.

Many high-street and specialist banks offer them, and they work in much the same way as personal current accounts. Banking services you’ll gain access to typically include a debit and credit card, online and telephone banking, and an overdraft facility.

There are some key differences between personal accounts and sole trader business bank accounts:

• Interest rates are typically lower with business bank accounts.
• You’re likely to pay more in fees for a business bank account. Monthly fees for example range from around £5 to £15 depending on the account’s features, though they’re often waived for new customers in an introductory period. You may also pay fees for activities like paying in cash and cashing cheques.
• Instead of incentives like cashback, business bank accounts often come with perks such as business advice, a dedicated account manager, and business service and product discounts.

Do you need a separate bank account as a sole trader?

You’re not actually obliged to open a separate business bank account as a sole trader. Limited companies are viewed as separate entities and should keep finances separate for legal and tax reasons. But as a sole trader, you are your business in the eyes of the law. The same goes for freelancers, contractors and gig workers.

There are several key reasons why many sole traders prefer to keep their personal and business finances separate, however… 

Benefits of using a sole trader bank account

Even if you’re not legally obliged to use a sole trader business bank account, there are plenty of perks to doing so.

One key advantage is complying with your personal bank’s terms and conditions. Most banks stipulate that their personal accounts can’t be used for business purposes, though you’re unlikely to get noticed if you receive occasional bank transfers for freelance work. But if you make lots of transactions and in-person cash and cheque deposits, your bank could close your account or ask you to open a business account.

Other motivations for opening a sole trader bank account include: 

• Simple tax returns: Having a separate business account makes filling in your tax return easier and less time-consuming than combing through your personal account for allowable business expenses. It also helps make sure you pay the right amount of tax.
• Clear cash flow: A sole trader bank account provides a clearer snapshot of your business’ finances. You’ll readily see how much cash is available as well as when money is coming in and going out, making it easier to spot potential cash flow problems.
• Future plans: Opening a business bank account can make your life easier if you want to apply for business finance as you’ll begin building a business credit rating. It also saves admin if you plan to turn your sole trader business into a limited company later down the line.
• Brand image: Sending and receiving money from a business account gives off a more professional image, particularly when requesting invoices from other businesses.

Drawbacks of using a sole trader bank account

As with most financial business decisions, there are some potential downsides to weigh up before opening a sole trader bank account.

• Fees: Most (but not all) business accounts come with different fees to budget for, whereas personal accounts are usually free to open and use.
• Admin: Having two accounts means managing two lots of cards, bank statements and account details. Remember you’ll save time on tax returns and cash flow reporting, though.

Which business bank account is best for a sole trader?

Not all sole trader bank accounts in the UK are built equal, so it’s important to think about your business’ banking needs before applying. Factors to think about when assessing your options include:

• How you handle money: Do you make a lot of cash or cheque transactions? Or do you primarily take card payments and bank transfers? The former favours a high-street bank with a local branch, while a digital-only account could work better for the latter.
• How you bank: On a similar note, think about how you’re most comfortable interacting with your bank. If you want to speak to someone in person, choose a bank with branches – just be prepared to pay higher fees to reflect their overheads.
• Service levels: You could have more interaction with a business bank account provider than you would with a personal account provider. Make sure to read reviews and research customer service reputation, as you’ll want to avoid draining your time and energy. 
• Features and perks: Sole trader bank accounts can come with a range of enticing extras. Potential perks include business coaching, software discounts and built-in reporting. Look for the bundle that offers the most value to your business.

How to set up a sole trader bank account in the UK

Many banks now allow you to apply for a sole trader bank account online, which is ideal if you’re busy running your business. But the process usually comes with a few extra steps and checks compared to opening a personal account.

You might need to have an interview over the phone or in-person and may be asked for various bits of information, including:

• Proof of your identity (e.g., passport or driving license)
• Proof of your address (e.g., a utility or council tax bill)
• Your business’ name and address
• Your business’ estimated annual turnover

You could also be asked for information on how many payments you make and receive in an average month to help the provider spot suspicious activity and protect your account.

Get extra help managing your finances as a sole trader

Sole trader bank accounts are useful tools for organising your business’ finances. If securing finance could help you take things to the next level, get in touch with our specialist advisors. We offer a range of tailored solutions for sole traders and will be happy to discuss your options in detail.