Do I need a business bank account?

Introduction

If you run a UK limited company, you must keep the company’s finances separate from your personal finances. Although the law doesn’t name a specific “business bank account” as mandatory, government guidance requires company banking to be kept distinct from personal banking, and the only practical way to achieve this is with a dedicated business account. Sole traders do not face the same legal obligation, but using a separate account still makes day-to-day bookkeeping and tax reporting far easier.

This article explains when a business bank account is needed, how the rules differ between limited companies and sole traders, what documents banks require, and how dedicated business banking supports compliance, clarity, and long-term business growth.

When does your business need its own bank account?

Whether you need a business bank account depends on how your business is structured. Limited companies must keep their company and personal finances separate. The simplest way to meet this requirement is through a dedicated business account. Banks also expect limited companies to use business banking products, and HMRC and Companies House rely on clear financial records during compliance checks.

Sole traders are legally the same person as their business, so they can use a personal account if their bank allows it. However, a separate account usually makes life much easier, especially when managing expenses, tax liabilities and growth.

1. Limited companies

A limited company operates as its own legal entity: it earns income, pays expenses, files taxes and holds assets independently of its directors and shareholders. Because of this, its finances must not be mixed with personal banking.

In theory, any account opened in the company’s name could satisfy this requirement. UK banks require limited companies to use business accounts, and their terms reflect this. A business account provides the necessary structure to maintain accurate financial records for Corporation Tax, annual accounts, and HMRC compliance.

It also prevents confusion when withdrawing money as salary, dividends or director’s loans, and it helps demonstrate credibility when dealing with lenders, suppliers or investors. Using a personal account typically results in restrictions, declined transactions, or a forced migration to a business product.

2. Sole traders and freelancers

If you’re still choosing between being a sole trader or a limited company, it’s worth knowing that sole traders are legally indistinguishable from their business, so they don’t have to open a business account. If their bank permits business use of a personal account, they can continue using it legally.

However, many banks restrict business activity on personal accounts, and even when allowed, combining personal and business spending makes it difficult to track income, identify deductible expenses, or prepare an accurate Self Assessment. It can also create complications during VAT registration or HMRC enquiries.

Using a dedicated business account, or a separate account used solely for business, helps sole traders maintain a clear financial picture, present professional payment details to clients, and build a record of their trading history for future lending purposes.

Keeping finances separate: Why it matters

For limited companies, financial separation is not an optional best practice – it is a legal requirement supported by Companies House and HMRC, and Government guidance on company and accounting records goes further than just banking.

Limited companies must keep:

• Shareholders, loans, and important decisions
• All money received and spent
• Assets, liabilities, stock, and trading information
• All invoices, receipts, contracts, and bank statements

These records are essential when preparing annual accounts and Company Tax Returns, and they must generally be kept for at least six years.

Using a personal account for company transactions makes it extremely difficult to demonstrate compliance

A dedicated business account gives the company a coherent financial footprint. Even sole traders find that separate banking makes demonstrating genuine business income far easier if HMRC ever conducts a review.

Why a business bank account makes sense

Even when not legally required, a business bank account usually proves beneficial. Here’s why.

1. Clearer bookkeeping and smoother tax return

When all business transactions run through one account, it becomes much easier to categorise income and expenses. Sole traders can compile accurate Self Assessment returns, while companies can prepare Corporation Tax and VAT submissions without sorting through personal spending.

2. Better visibility of performance and cash flow

A dedicated business account provides a realistic view of your business's performance. You can see exactly what the business earns, what it spends, and how cash flows in and out.

3. Access to business tools and integrations

Many business accounts connect directly to accounting and bookkeeping software. Integrations with systems such as Xero, QuickBooks, FreeAgent or Sage can automate bookkeeping, streamline invoicing, and capture receipts digitally.

4. Building a business credit profile

Banks and lenders typically assess business performance before offering credit. A well-managed business account establishes a trackable financial history, enhancing your eligibility for loans, overdrafts, and other forms of financing.

5. A more professional impression

For many clients, especially in B2B settings, it feels more professional to pay a business account rather than a personal one. Having a dedicated account reinforces credibility and transparency.

What do I need to open a business bank account?

Different banks have slightly different requirements, but most will ask for a similar set of documents. These usually include:

• Proof of identity (passport, driving licence)
• Proof of address (recent bank statement, utility bill)
• Business details, such as trading name and nature of activities
• Companies House registration number and registered office (for companies and LLPs)
• Tax information, such as your Unique Taxpayer Reference (UTR), and VAT details where relevant

Some banks may also request partnership agreements, articles of association, or evidence of trading activity. Many now carry out identity checks digitally, so you can usually open an account online or through an app.

How to choose the right business bank account

If you decide to open a business account, think about how your business works day to day.

Consider the types of transactions you expect: mostly bank transfers, or regular cash deposits? Do you operate solely in the UK, or do you make international payments? If you receive cash frequently, a bank with a convenient branch or Post Office access may be best. Digital-first banks may be a suitable option for businesses that operate exclusively online.

Costs vary between providers. Some accounts have no monthly fee but charge for certain transactions, while others bundle transactions into a package. It’s worth looking at both the monthly fee and typical transaction charges when comparing accounts.

You may also want to consider the additional tools and support offered by various banks – such as accounting software integration, onboarding support for new businesses, or access to specialist advisors as your company grows.

1st Formations provides referrals to up to 8 of the leading business banking providers in the UK, including Barclays, Natwest, Monzo, Lloyds, Anna, Zempler and Tide. We also provide a business bank account referral for non-resident customers to WorldFirst, which provides a business account suited to founders and directors of UK limited companies based overseas.

Compliance checklist: How a business bank account helps

A dedicated business account supports compliance across several areas:

• Clear division of company and personal finances
• Accurate record-keeping for Companies House and HMRC
• Smooth preparation of Self Assessment, VAT, and corporation tax returns
• Reliable digital records for Making Tax Digital
• Easier access to business lending
• Clear financial information for accountants and bookkeepers

For limited companies, particularly, separate banking is not a one-off step, but an ongoing requirement linked to the company’s legal status and responsibilities.