Do You Need a Business Bank Account?

summary

• No legal requirement to use a business bank account in the UK for the self-employed.
• A majority of the self-employed in the UK use personal accounts for business transactions.
• New banks like Starling and Tide offer perks like zero monthly fees and digital sign-up.
• Separate business accounts aid in clear financial management and tax reporting.
  

🎧 Listen Now: Sidehustles.co.uk One-Minute Podcast: Do You Need a Business Bank in the UK?

Transcript available below.

Your side hustle is starting to generate income – that's fantastic news! But now, you may wonder: is it a legal requirement to have a separate business bank account? It's a common question, especially as your side hustle starts bringing in more income. While the short answer is no, there isn't a legal mandate that compels small business owners or side hustlers to maintain a dedicated business bank account, understanding the nuances behind this decision is crucial.

The UK law doesn't explicitly state that you must have a business bank account for your side hustle. However, it's important to consider the practicalities and potential legal implications of mixing personal and business finances. Keeping them separate can simplify tax reporting and financial management, potentially reducing legal headaches down the road. This guide aims to clarify these aspects and help you decide whether a business bank account is a strategic move for your side hustle.

Read on to discover how the right banking choice could be a game-changer for your growing venture.

Quick Comparison: UK business banks

Business and personal bank accounts work similarly, but the former is something that you only use for purely business transactions. Let’s say you run an online fashion store that earns more than £500 a month. If you only have a personal account, it will be harder to distinguish which of your transactions are personal or business. Having a business account helps you easily manage transactions for accounting purposes.

The main issue is that most business bank accounts are more complicated and may require additional documents before you can open one. Unsurprisingly, around 58% of self-employed workers in the UK use personal bank accounts for business transactions. 

There isn’t a governing body in the UK requiring you to open a business bank account — not even HMRC. Still, you should consider opening a bank account if you are a growing company. Those who are successful enough to turn their side hustle into a main income source will find the benefits worth the initial hassle.

Some banks discourage using personal bank accounts from being used for business transactions. These terms aren’t usually enforced, but significant personal transactions stemming from a growing business may raise red flags.

The most obvious benefit of having a separate business account is that it can help you separate your personal and business transactions. This benefit helps keep records accurate and makes it easier for accounting software to perform bank reconciliation. Here are other more underrated benefits to consider. 

May Protect You From Liability

With a business bank account, you can use the funds to cover any liability claims. This decreases personal liability. In other words, a business bank account is another layer of protection from financial losses.

Access to Credit Options

Some banks may offer a line of credit for emergencies, such as overdraft facilities. In other cases, the bank can provide a business credit card that you can use to build a credit score for your new business.

Helps Create a Professional Image

If you have a side hustle that involves people paying with cheques, having your business name as the payee instead of your own name creates a more professional and polished feel. Now, customers know that you’re taking things seriously, making them more likely to repeat business with your company.

Once you decide to open a business account, the next step is choosing the bank. Sure, you can open an account with the same bank that holds your personal account. However, others offer more perks or lower monthly fees. Remember that some banks may perform credit checks, which could become bad for your credit score if you get rejected. 

• HSBC: HSBC can help you create a small business banking account, and it offers 12 months free, depending on your eligibility.

• Lloyds Bank: Like HSBC, Lloyds Bank offers business accounts for start-ups and small businesses. It offers 12 months of free banking and £7 every month after.

• Santander: Santander is another major UK bank with options for small businesses and sole traders. The bank is known for the complementary financial planning that comes with opening a business account. 
  

In the ever-evolving landscape of British banking, challenger banks are at the forefront of revolutionising the traditional banking paradigm with their innovative and technology-driven approach. Operating predominantly online, these banks have disrupted the established order, presenting a novel alternative to conventional high-street banks. They cater to a modern generation of side hustlers that demand rapidity, efficiency, and digital savvy. UK challenger banks have carved their niche by focusing on user-friendly experiences, streamlined processes, and competitive offerings.

This new wave of banks isn't just challenging existing norms but is also redefining the very essence of banking in the digital era, making them a growing favourite among both individual consumers and businesses.

Starling has only been around since 2016, but they’ve become popular among sole traders because of features like zero monthly fees and dedicated tools for small business operations. The company boasts a 100% digital sign-up process, so you won’t need to visit any physical branch to open your account. 

Like Starling, Tide is a digital bank that doesn’t charge monthly fees. It has plenty of options for anyone who needs a business bank account — even freelancers. You can also integrate Tide with accounting software like Xero or Quickbooks, making bank reconciliation more streamlined. 

Monzo is another popular online bank in the UK, but it’s marketed more towards personal use. However, it offers business bank accounts for small businesses. Only sole traders and Limited Companies can open this type of account in Monzo, and they will enjoy zero monthly fees, instant bank transfers, and fully digital sign-ups.

Revolut is a rapidly growing digital bank in the UK, primarily known for its personal finance solutions. Despite focusing on personal banking services, Revolut also caters to the business sector, offering business bank accounts suitable for various enterprises. These accounts are accessible to freelancers, sole traders, and limited companies, providing them with no monthly fees, quick bank transfers, and a fully digital sign-up process. Revolut's business banking options are designed for modern, digitally-savvy businesses looking for flexible and efficient banking solutions.

If you need a bank account opening quickly, Cash Plus serves as a practical banking solution for small businesses, particularly those that find opening accounts with traditional banks to be a daunting and lengthy task. While it may not offer the extensive range of additional features found in some larger banks,

Cash Plus is known for its straightforward approach, making it an accessible option for small business owners. Its primary focus is providing essential banking services without the complexity often associated with traditional banks. This focus on simplicity and accessibility makes Cash Plus especially suitable for small businesses that require a no-frills, reliable banking experience but may find it limited in terms of advanced banking add-ons and functionalities.

Cash Plus is often a viable option for side hustlers in non-traditional sectors, for example, Only Fans creators and other social media creators, who may struggle to open bank accounts with the high street and challenger banks.

Opening a business bank account in the UK is a straightforward process, but it requires careful preparation to ensure you have all the necessary documentation. The process can vary slightly between banks, but here's a general outline of what to expect:

Choose Your Bank and Account Type:

After deciding on a bank, you may need to schedule a physical meeting, or, in many cases, you can complete the process online.

Timeframe for Opening the Account:

Typically, it takes between one to four weeks to open a business bank account, depending on the bank and the completeness of your application.

Documentation and Information Required:

Be prepared to provide a range of documents and details, including:

• Personal identification and proof of address, such as a passport, driving licence, and utility bills.
• Your business name, address, contact details, and start date.
• Nature and details of your business activities.
• Information on the funds already invested in your business.
• An estimate of the amount you plan to deposit into the account.
• For limited companies and partnerships: Companies House registration number, certificate of incorporation, and articles of association.
• Number of employees and their employment status.
• A well-structured business plan.
• Expected turnover and cash flow forecasts.

Working with an Accountant:

It's advisable to collaborate with your accountant, if you have one, to refine your business plan and financial forecasts. This ensures the bank has all the information needed to process your application efficiently.

In the UK, one crucial aspect to consider when choosing a bank for your business account is the £85K Financial Conduct Authority (FCA) protection. This protection is part of the Financial Services Compensation Scheme (FSCS), safeguarding your deposits up to £85,000. In the event of a bank’s failure, this scheme ensures that your funds are secure, providing a significant safety net for your business finances.

FSCS protects you up to £85,000 in total across all accounts you hold with a bank. If you're a sole trader, your company is not treated as a separate entity. That means FSCS can protect up to £85,000 in total across all personal and business accounts you hold with a bank. For this reason, many side hustlers opt to have their business bank account with a separate bank from their personal accounts.

It's important to check whether your chosen bank is FSCS-protected, as this protection offers peace of mind and financial security, which is especially important for small businesses and side hustlers managing their growing financial needs.

A business account may not be required for those with side hustles, but it offers plenty of benefits that make it worth getting. You’ll have an easier time separating personal and business transactions, leading to more accurate records. In addition, you’ll have more protection against personal liability and a more professional flair to your business.

While traditional banks may charge monthly fees, you can open a free one online with banks like Monzo and Tide. These new challenger banks may be a good choice, especially when starting your side hustle.

There's another essential topic to consider for your side hustle's financial health: Do you need to use accounting software? While you've explored the realm of business banking, the next step is understanding how technology can streamline your financial management. Our upcoming article delves into the world of accounting software, helping you decide whether it's a necessary tool for your business. Just as choosing the right bank account is crucial, selecting appropriate accounting software can significantly enhance your efficiency and accuracy in managing finances. Don't miss this insightful piece – it could be the key to taking your side hustle's financial management to the next level.

DO YOU NEED TO USE ACCOUNTING SOFTWARE?

🎧 Listen Now: Sidehustles.co.uk One-Minute Podcast

Do You Need a Business Bank Account in the UK?

Welcome to the Sidehustles.co.uk One Minute Podcast. In the next 60 seconds, we're sharing a real-world insight from our network of seasoned side hustlers. This quick tip is designed to offer you practical advice that you can apply immediately in your side hustle journey.

Today, we're looking at whether you need a business bank account for your side hustle. Many side hustlers in our network have faced challenges opening business accounts with traditional high-street banks, especially with all the bank closures, encountering hurdles such as stringent requirements and lengthy, never-ending processes. However, a significant shift happened since the pandemic, when many small business owners turned to the new challenger banks. These modern, digital-first banks such as Starling and Tide, have been a game-changer, offering a more streamlined, user-friendly approach to opening business accounts. They often come with fewer barriers and are more attuned to the flexible needs of small-scale entrepreneurs and side hustlers. This real-world experience highlights a key takeaway: if traditional banking routes are proving challenging for your side hustle, exploring the offerings of challenger banks could provide a much smoother, more accommodating banking experience. This tip could be the turning point in managing your side hustle's finances more effectively.

That's your one-minute real-world insight. Stay tuned for more!

https://www.businessnewsdaily.com/6477-business-bank-account-documentation.html 

https://www.theguardian.com/money/2013/feb/10/self-employment-what-you-need-to-know 

https://www.business.hsbc.uk/en-gb/products/start-up-business-bank-account 

https://www.lloydsbank.com/business/business-accounts/startup-small-businesses.html 

https://www.santanderbank.com/business 

https://www.starlingbank.com/ 

https://www.tide.co/ 

https://monzo.com/business-banking/sign-up/