A sole trader is the exclusive owner of a business, entitled to keep all profits after tax has been paid, but liable for all losses. A sole trader also takes on some financial responsibilities, from filing your self assessment income and tax return with HMRC, managing invoices and keeping a record of all your business related transactions. This can be easily managed by opening a sole trader bank account.
Self-Employment for a Sole Trader
To become a sole trader you will need to notify HMRC by registering for self-assessment. You should register as soon as possible if you are starting self-employment for the first time. However you cannot register more than 28 before you start trading. Note that you need to have registered for self-assessment by 5th October following the end of the tax year for which you wore tax. For example, if you earned income from self-employment during the tax year 2021/22, you need to register by 5 October 2022. If you become self-employed in the 2022/23 tax year, you should register by 5 October 2023. If you miss the deadline for any reason you could face a penalty.
Self Employed Versus Limited Company
As a self employed worker there is no distinction between your business profits and your personal assets, because you are your business. This means that in legal terms your savings and belongings are one and the same as the assets of your business. This means that if legal action is taken against you, they are taking it out on you personally and this puts your personal assets at risk. There is no limited liability, unlike running a limited company, whereby the business is considered a separate legal entity. Whilst this may sound risky, there is actually little advantage to registering a limited company while any profit you make stays below £50,000 annually. It is more cost effective to be self-employed, until your profit reaches £50,000 or over. Above this threshold, it becomes more tax efficient to register a limited company. Prestige Business Management can provide clear guidance in this area. We recommend that you read our Guide to Self Employment Versus Limited Company to get you started.
What is a Sole Trader Bank Account?
A sole trader bank account is simply a business account for one person. Most banks offer these as standard. Most often they function in a very similar way to your personal current account and each offers facilities such as a business cheque book, a debit and credit card, online and telephone banking and overdraft. However there are some differences. A business bank account will usually offer a lower interest rate than a personal bank account, but may be subject to higher fees. This could be a monthly account fee with additional costs to some transactions such as paying in cash or cheques over the counter. The best accounts to choose from will depend on what your particular needs are and how you will be using the account. Online banking offers a number of options and flexibility. These can be opened quickly and easily, but it’s important to find out if this will provide you with all the services you need before you start making deposits.
Why do I Need a Sole Trader Bank Account?
Some sole traders start out using their personal bank account. This may seem simple when you are trading small amounts. However this approach can quickly make your accounting complicated and may cause mistakes in reporting your profits, which could cost you money. There is no law against using your personal bank account as a sole trader. However some banks forbid this and most recommended that you open a dedicated sole trader account. Especially for a large number of business transactions. Selecting a dedicated sole trader bank account helps you keep a good record of your business finances. Using a sole trader bank account that is separate from your personal finances makes it easier to manage the cash flow of your business and keeps everything nice and clear. Opening a sole trader bank account will help you claim all of your allowable expenses. Plus this saves you having to present HMRC with details of all your personal spending if they ask to see your records. You can easily see how much cash your business has, as well as when you have been paid and when you have paid your suppliers. If you find that you are making lots of deposits or paying cash in regularly, these services may be better provided by a sole trader bank account than a personal account. Additionally, using a dedicated sole trader bank account looks professional. It builds trust with your clients to request an invoice payment to be made to ‘Your Sole Trader Business’ as opposed to your personal bank account. Particularly if you are registered for VAT. Which type of bank account you choose will depend on your business model. A limited company and limited liability partnerships are legally required to open a dedicated business account. You will be required to run all your business transactions through this, such as expenses and income. The reason for this requirement is that a limited company is a separate legal entity to the business owner or director. Since the limited company owns any profit it generates, this must be kept separately to personal accounts. There are legal processes for moving money from a business account to personal income, typically paying a salary via PAYE. Or paying out a dividend on profits after corporation tax.
How do I Choose the Best Sole Trader Bank Account?
Did you know that 75% of British businesses are sole traders? Also, whilst many of these are single-person businesses, sole traders can also hire staff. The sole trader bank account you choose will depend on how you do business. Consider how most of your customers will pay for your goods and services. You may transact mostly in cash in which case you will need an affordable and accessible counter service. Or perhaps most of your transactions will take place online. In either case Prestige Business Management can help you choose the right cloud accounting software to help you manage your record keeping needs, whichever way you like to do business. Financial products and services and rates fluctuate but there are a few simple questions you can ask to help you choose the right account for your sole trader business.
Fees
Many sole trader and business bank accounts charge a fee for their services. Or they offer an introductory rate, assuming that as you become more established your profits will grow. Some offer a fixed monthly rate for all electronic payments which can be cheaper than banks that charge per transaction. Compare the rates and services on offer. You know your business best of all so research which accounts have the lowest fees for the types of transactions you will use the most.
Cash
Another consideration is whether you will be doing cash transactions, or hardly at all. If so, make sure you have a convenient way of paying cash in or out, depending on your needs. This may be subject to a fee with some sole trader bank accounts. If you will be depositing cash choose a bank that is close to you which is easy to access.
Customer Service
This is probably the last thing on your mind while looking to open an account. But the customer service offered by your bank will make all the difference when you come to need it. Banks that offer flexible and easy communication always come out ranking top. Check online for reviews of bank accounts. Avoid any banks with consistently poor customer service reviews.
Software
Check what online banking facilities are offered. This could be 24 hour app based banking or the ability to link with your preferred accounting software.
Nice to Haves
If you have managed to short list a few banks that cover your needs, think about what extras they may offer that could be suitable for you either now or in the future. These are additional perks to the deal breaker issues. Consider transaction limits and overdraft facilities.
Next Steps
You may want to apply for a business loan or credit card in the future. Opening a sole trader bank account will make you eligible for these services and you can start building a credit history for your business right now, with a well managed sole trader bank account.
Prestige Business Management Works for You
We can help start ups register and manage cash flow forecasting. We also have a wealth of knowledge about the best online accounting platforms. Find out what we can do for you. Call us today on 0203 773 2927.
