Are you starting up your own business or taking on some freelance work? You might be wondering whether you need a business bank account or if you can use your personal bank account for work-related transactions. We spoke to Michaela Pleskova from Revolut’s Business Bank Account team, and asked her to break down who needs a business bank account.
If you work for yourself, get a business bank account
Let’s look at what the law requires of you. If you’re setting yourself up as a sole trader, you aren’t required to have a business bank account. If you’re setting yourself up as a limited company you are.
Most of the time though, even the smallest of sole traders will benefit from setting up a dedicated business bank account. So if you’re asking whether you need one, the quick answer is ‘just do it’.
Business bank accounts can be:
- Quick to set up
- A great way to understand your business finances
- An essential tool to prepare for tax time.
There’s simply no reason not to get yourself set up with business banking.
You can set up a business bank account in minutes
Look for a business bank account provider (like Revolut) who offers a bank account with quick online application and a ‘free’ or ‘starter’ account plan. These accounts can be upgraded to a more fully featured account if and when your business starts to grow, but should cost you nothing in the short term.
And remember, if you decide that working for yourself isn’t for you, you can simply close your business account without incurring any costs.
You’ll understand your business finances better
To put it simply, there are two types of business transactions you will make. Money in and money out.
When you make money, get your customers to pay you into your business bank account rather than your personal account. If you have an online accounting software like Clear Books, you can link your accounting software to your online banking to quickly match ‘money in’ transactions with invoices. That way, you’ll have a clear view of what invoices are paid, and which customers you still need to chase for payment.
When you spend money for your business, use your business bank account. They usually come with a Mastercard or Visa Debit Card to make transactions easy.
You’ll be able to see all your business expenses in one place and you can classify your transactions using online banking or your linked online accounting software to track each bill or receipt. Some of these will be deductible at tax time (saving you money you would otherwise owe in tax).
It’s easy to get in a muddle when your personal and business transactions are all made in the same account. By setting up a business bank account, you’ll understand your business finances much better.
Be ready for tax time
When you work for someone else, they pay your tax to HMRC for you. When you work for yourself, you need to keep tax money aside throughout the year. At the end of the year, you’ll then complete a self assessment for HMRC. Self assessment calculates the amount of tax you owe, and usually results in a bill you need to settle with the tax man.
If you set up a separate business bank account, you’ll know exactly what you’ve earned (‘money in’) and what expenses you’ve incurred (‘money out’). Remember ‘money in’ minus ‘money out’ equals the pre-tax profit you’ve made. A great rule of thumb is to keep some of the profit (say 20 or 30%) in your business bank account for tax time. You can pay yourself the remaining balance.
Ready to get started?
You can find out more about the features of business bank accounts by visiting Revolut today.
About Michaela Pleskova
Michaela is a Senior Marketing Manager at Revolut Business. She is passionate about helping SMEs to work more efficiently.