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The way we work has changed. The gig economy is booming, many more individuals now work on a freelance basis, and the viability of the side hustle has grown and grown. Business bank accounts might be a legal requirement for limited companies, but they can be useful for anyone who works for themselves and wants to get a better handle on their finances. But do you really need one? Read on to find out everything you need to know.

What is a business bank account?

On the most basic level, a business bank account is just a dedicated account for your business finances. Keeping an account for business use maintains a degree of separation from your personal current account.

A business bank account is used for both incoming and outgoing transactions. It might act as the point of payment for your invoices, the account you use to pay for any business-related expenses, or the source of a regular draw-down to your current account as you pay yourself a de facto wage.

Is it a legal requirement to have a business bank account?

It depends on your business. The following do not require a business bank account, though they may benefit from the extra features and support such accounts offer:

• Freelancers

• Sole Traders

• Gig workers, e.g. Uber or TaskRabbit

• Contractors not operating through a limited company

• Those generating a small second income

If you fall into one of these categories, there is no legal distinction between your personal and business finances. It is only a legal requirement to use a business bank account if your business is a limited company registered with Companies House.

What are the benefits of a business bank account?

While the exact features will vary between different accounts and providers, a business bank account will usually offer the following benefits:

• Easier accounting. A business bank account makes it straightforward to identify and track particular payments from clients, and to keep tabs on general cash flow

• Tax readiness. Keeping business funds in one place helps ensure you are paying (and saving) the correct amount of tax. A business account should offer the ability to create a separate ‘pot’ in which to ringfence the 30% you should be keeping aside for HMRC

• Better connectivity. Many business accounts can be linked directly to accounting software, which can streamline the process of invoicing and financial preparation

• Extra services. If your business grows, you may need access to advanced banking services like payroll or bulk payments. Start using a business account early, and these can easily be added later on

• Building credit. A business account provides evidence of your company’s credit history, which could be helpful if you one day apply for a business loan or additional finance

• Business expertise. If you have a business account, you’ll get access to your bank’s business team, who may be qualified to answer difficult questions which can help you keep on track financially 

• FSCS protection. Most business accounts are covered by the Financial Services Compensation Scheme, which will cover your business funds up to £85,000 in the event of a bank collapse. Make sure you check that your chosen bank does before opening an account

• Brand recognition. A dedicated account offers you an air of professionalism. Even if you’re not operating a limited company, a business bank account means clients can pay into an account labelled with your company name rather than your given name

What does a business bank account cost?

You will often have to pay a set monthly fee to maintain a business account. Fees vary by provider, though some may offer your first year or two free as an incentive, while others may go further and offer an entirely free basic business account. 

Look out for fees attached to certain basic functions. In some cases, you might incur a flat charge when paying funds into the account or making transfers, for example, or there may be significant penalties for using the account’s overdraft function.

Add-on features and functions will generally lead to increased fees. Again, however, some providers may offer certain options for free. If you often make international transactions or need VAT tools, for instance, an account that bundles these as standard may be more attractive than one that doesn’t.

It is often difficult to know how to choose the best business account, but check out our guide to business bank accounts to compare the fees and features that various options offer. 

Is it difficult to open a business bank account?

This depends on the provider. Some will make the process of setting up a business bank account easier than others. Whichever bank you choose, however, you will have to fill out an application, and wait to see if you’ve been accepted.

This might not take long – filling out an application could take as little as ten minutes – but you’ll need to be the owner or a director of the business, and have all of the pertinent information to hand. This might include:

• Your personal details

• Personal details of any directors, partners, or other significant personnel involved with your business

• The trading address and contact details of your business

• Details about employees and general business activity

• Year-end accounts and cash flow forecasts

• Your registered company number (if yours is a limited company)

How to open a business bank account

Simply go to your chosen bank and apply. While you could reach out to a local branch or talk to a bank’s relationship manager directly, it’s often simpler to apply online – and in many cases, automated systems mean you may learn whether your application has been accepted very quickly.

Although having an existing business bank account will likely not allow you to skip the queue if you’re thinking of switching your business bank account to a new bank, you may be able to avoid the initial application process if you are applying for a second account with your existing bank. 

Note that certain individuals will not be eligible to apply for a business bank account. If you have been declared bankrupt or faced a County Court Judgement or Court Decree, your application is likely to be rejected.

Can you use a personal account for your business?

In some cases, yes. Sole traders, freelancers or gig workers do not need to apply for a business account, and can use a personal account for business finance. As long as the bank account offers you ready access to your business funds and offers clients a way to pay you, it will work.

Using one’s regular personal account, however, is not recommended. Dedicating an account for business use, even if it is not specifically a business account, helps to split your business and personal finance, and makes managing your funds far easier.