If you’re thinking of contracting through your own limited company, opening a business bank account should be at the top of your to-do list.
It’s a fundamental principle of company law that your limited company’s money can’t mix with your personal money. But even if this weren’t an issue, a separate bank account still makes sense, because it’ll be easier to stay on top of your business finances. And that means you’ll be less stressed come tax time.
But how do you pick the right business bank account? What are the must-have features and the pitfalls to avoid?
Why do you need a business bank account for your contracting business?
The most compelling reason to have a business bank account as a contractor is also the simplest: if you keep your money and your company’s money in the same account, you’re asking for trouble.
Limited companies have separate legal personalities. So when you contract through a limited company, your client is really doing business with your company, not with you.
The advantage of this is that it shields you from business risk. If you get sued because you’ve made a mistake on the job, for instance, it’s the company that’s on the hook for legal costs and compensation. And while these costs could bankrupt your company, your home and other personal assets will be safe.
The flipside is that the money you invoice your clients belongs to your company and has to stay separate from yours. So, unless you intend to get paid exclusively in notes and coins — not very realistic in this day and age — you’ll need a bank account in your company’s name.
That said, the advantages of having a separate business bank account go beyond complying with company law. In fact, it’s worth opening a separate business bank account even if you’re one of the extremely rare contractors who work as sole traders.
Why? Two reasons:
It keeps your finances organised
There’s no need to sift through your transactions line by line to separate business transactions from personal ones. Which means you’ll have less admin to do, save yourself the frustration, and make it easier on yourself — or your accountant — to file your taxes
Using a personal account for business purposes breaks most banks’ terms and conditions
Not an issue if they don’t realise it’s happening, of course. But if they do catch on, they could close your account and you’d end up with a double whammy: nowhere to receive client payments or keep your personal funds
Choosing a business bank account as an IT contractor: what do you need to consider?
It’s tempting to take the easy route and open a business account with the same bank you have your personal account with. Business, personal… as long as it’s a bank account, it’s all the same, right?
Well, not really.
While all high street banks offer business banking, the quality, features, and fees can differ significantly.
It’s also worth noting that, in most high street banks, personal banking and business banking are separate divisions. So while you might be perfectly happy with your bank’s service when it comes to your personal account, their business banking service might be a completely different experience.
So where do you start?
Here are five things to consider.
1. What fees do they charge?
While we’re used to personal current accounts being free at the point of use, business bank accounts are a different story.
Most banks have introductory periods during which you can use your new business bank account for free. But once that period expires, you’ll need to start paying for the privilege.
Banking fees and charges are allowable expenses, so they’ll reduce your tax liability. That said, nobody likes giving away a chunk of their profits to the bank simply so they can have somewhere from where to pay business bills and store their earnings. So it’s worth looking at ways to keep these costs as low as possible.
Banks charge for business accounts in one of three ways:
- A flat monthly fee. This is always the same regardless of how — and how much — you use your account
- Per-transaction charges. While there’s no monthly fee, the bank charges a fee every time you make a transfer, pay a bill, withdraw cash, or perform some other type of transaction
- A mix of both. This could be a monthly fee plus charges on some types of transactions. Or a fee that only kicks in if you go above your quota of free transactions
As a contractor the vast majority of your transactions will probably happen online through faster payments. So an account that has free or low-cost online transfers is probably the best value, even if it charges high fees for things like depositing cash and cheques. If you tend to work on one project at a time, you may even manage to stay within your bank’s quota of free transactions and avoid fees on an ongoing basis.
That said, don’t discount accounts with monthly fees. Some banks will waive the fee if your balance never falls below a certain amount. So if it’s feasible for you to keep a ‘float’, your account might cost you nothing.
Cashplus Bank currently has an excellent special offer. You can earn 1% cashback on card purchases, up to £1,000 per month. They will also refund your first year’s £69 annual fee. You can set up an account in just 4 minutes. The bank is FSCS protected up to £85,000. Find out more here.
2. How good is their online service?
Asking this question might seem unnecessary in 2021, but you’d be surprised.
Business banking apps vary widely in quality. So, seeing as you’ll probably be doing most of your banking online, it pays to choose carefully. You don’t want to get stuck with a clunky, glitchy app that crashes every time you try to check if you’ve been paid.
Start by looking up banking apps on the App Store or Google Play Store. Which ones have the best reviews? Keep in mind that some banks have separate apps for personal and business banking, so make sure you look up the right one.
It’s also a good idea to check if the app easily connects to other tools such as accounting software. This will save you from having to upload transactions manually and your accountant from having to go through every single transaction to check if it’s correct.
3. How hard is it to open an account?
Nine times out of ten, you can start a business bank account application online. But what happens next depends on the bank. Where, in some cases, the process is completely online, other banks may need you to finish by going to a branch or speaking to someone over the phone.
The documentation you’ll need to present also varies. While all banks will require proof of ID, proof of address, proof of your right to live in the UK, and your company details, some banks may have additional requirements.
Needless to say, the more involved the account opening process is, the longer it’ll take for you to get up and running, and the longer it’ll take for you to start being able to take payments from your clients.
4. What else do you need aside from day-to-day business banking?
While any business bank account worth the name will let you check your accounts 24/7 from an app, pay and get paid online, export statements, and set up direct debits, the standout accounts also have other perks.
With this in mind, it’s a good idea to have a think about what your contracting business might benefit from. Chances are, there’s a banking product that might meet these needs.
Perks can include:
- Preferential exchange rates. Foreign transactions cost small businesses £4 billion a year in hidden charges. So if you have foreign clients, this could save you a fortune in the long run
- Money off other business tools. For example, some business bank accounts give you access to accounting software for free. Again, this could save you hundreds of pounds a year
- Cashback on business-related purchases.
- Interest, albeit this is becoming increasingly rare on business current accounts
5. What’s the support like?
How would you rather speak to your bank? Are you happy using in-app chat, or would you rather be able to pick up the phone?
It goes without saying, but speaking to your bank should be easy, especially if something goes wrong.
That said, support isn’t just about getting help if you can’t trace a payment or see suspicious activity on your account.
Being a contractor involves more than delivering a service to clients. You also need to take care of admin, keep up with applicable rules and regulations, and do all the other million and one tasks that running a business entails.
A business account that gives you access to business training or a legal advice helpline you can consult when you’re in a tough spot could be hugely valuable.
Don’t pick just any business bank account
While a bank account is a must if you’re a limited company contractor, it doesn’t mean any account with any bank will do.
A good business bank account is more than just a place to keep your money and pay your bills. Picking the right account could slash your admin, save you money, and help you build a stronger, more sustainable contracting business.
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