Nowadays, it’s near impossible to function without some kind of bank account. If you were employed previously, you most likely have a personal account to which you employer deposited your salary. Now that you're freelancing, you'll have to decide if you should also open a business account.
In this chapter, you’ll decide the most important banking options for your business. There’s no legal requirement for you to open a business account when you start freelancing in the UK. Your choice depends on the business structure you’ve chosen. So let’s take a look at these.
Decide what bank account you’ll need
Sole trader
Since your business and personal affairs aren’t seen as separate, you can use a personal account to run your business. So, if you’re running a small, part-time business with few transactions, for example, you may feel that sticking with your personal account works for you. But not all banks will let customers use personal accounts for business transactions so check with your bank first.
If you want to keep your finances as simple as possible though, open a separate business account. Using one account for both personal and business transactions will create confusion when you do your accounting.
Partnership
As with sole traders, your business is not seen as separate from your personal affairs. However, because there are two or more people investing money in the business, choosing one person’s personal account to run the business won’t work.
Despite not being seen as a separate entity by law, it’s a good idea to establish your partnership as though it is.
Limited company
Legally, limited companies are seen as separate entities from the individual/s who own them. Your company must have an account that clearly shows the money coming and going.
Identify your options
We’ve established that keeping your business finances separate from your personal ones is a good idea from the start. But what should you look for when opening one? There are six areas to consider:
Free banking for an initial period
Business debit or credit card
Interest rates
Foreign exchange fees
Online banking
Customer card payments
1. Free banking
The biggest difference between business and a basic personal bank account is the former charges monthly fees. Most do offer a fee-free introductory period though, which can stretch to as long as two years with some banks, so check what each bank offers before you apply.
2. Interest rates
The interest rate is the percentage you’re charged by a lender if you borrow money. For example, if you want to borrow £1000, and the interest rate is 5%, you will pay back £1050 (ie 5% of £1000 = £50).
For a savings account, however, it works in reverse. When you deposit money, you are effectively lending the bank your money, which they then invest. They pay you interest, so the higher the interest rate on savings accounts the better.
Look for loans with the lowest interest rates and savings or deposit accounts with the highest.
3. Business debit or credit card?
A debit card deducts money directly from your bank account. It, therefore, helps you manage the money you actually have and enables you to make electronic payments from the funds in your bank account. Debit cards are often free.
When you use a credit card, you are effectively borrowing money from a credit card company. So, if you don’t pay them back within a set time frame, you will be charged interest.
Credit cards offer complimentary purchase insurance that will reimburse any payments you make using your card (from £100 to £30,000) if, for example, the company you buy from goes bust.
It can also help you develop a good credit history – important if you want to take out a loan in the future. Business credit cards usually charge an annual fee (around £30).
4. Foreign exchange fees
If you plan to work for companies abroad, you’ll need an account with the best foreign exchange fees. Always check and compare these before opening your account.
5. Online bank account
Online bank accounts are usually cheaper than traditional high street accounts because they have fewer overheads (staff, business premises, etc.). Other perks can include no annual fees, no deposit minimum and interest paid on current and savings accounts. They can also include invoicing and bookkeeping tools.
6. Customer card payments
Depending on the nature of your business, you may need to accept payment by debit or credit card. Paypal, iZettle and Sum Up are three companies offering card readers for small businesses. You’ll pay a fee for the card reader (which varies from £29 to £59) and are charged a fee on every transaction. They can also invoice, send receipts and generate sales reports.
Open an account
Every bank has its own set of eligibility criteria. This is a list of conditions you must meet before they will allow you to open an account and varies from bank to bank.
The four biggest banks in the UK are:
But there are many smaller banks, building societies (financial institutions owned by its members rather than shareholders) and online banks that also offer business accounts. You can weigh up the best of these on comparison websites such as MoneySuperMarket or GoCompare.
Are there any bank accounts specifically for freelancers?
Yes, Coconut has a bank account specifically for freelancers. The account also promises to calculate the self-assessment tax you owe and your expenses. The app is in beta, which means it’s been pre-released for use by the public so the company can make final small tweaks to the software.
What will I need to open an account?
If you meet the bank’s criteria, you’ll generally need to provide ID and one or two documents as proof of address. Examples of these are below.
Proof of ID | Proof of address |
Passport, driver’s licence, ID card | Bank statement, utility bill, council tax bill |
Now, you’ve got the right bank account, you’ll need to set up your basic accounting tools. We’ll look at these in the next chapter.
