When you set up a limited company, you are creating a separate legal entity from yourself so you need to set up a business bank account in the company name.
This ensures that all the financial transactions for the company are completely separate from your own personal transactions. Some companies opt for complicated multiple account structures, but the majority of freelancers and contractors require a simple current account with a debit card and a savings account to put money aside for planned expenses such as tax liabilities, insurance and annual fees. Keep it as simple as you can. Remember: more accounts mean more admin.
Why do contractors need a business bank account?
Your limited company, as a legal entity, needs a separate bank account to handle financial transactions related to the business. It’s also common sense to keep your business’s financial affairs separate from your own. You can keep track of your business finances and there is an audit trail that supports your accounts should HMRC require evidence of your financial transactions.
How to choose a bank for your contracting business
The majority of the high street banks provide a business banking service in addition to specialist corporate banks, so there is a wealth of choice when selecting a banking provider. It’s best to do some research first to narrow your choices down to a shortlist before going in to discuss with the respective business service representatives at each one. Here are some things to consider when making a selection:
- What sort of transactions are you going to be making? This affects how you’ll work with the bank and what they’ll charge for the service. How are people going to pay you? If it’s all electronic transfers, little or no cheques and cash, then ‘transaction charges’ are likely to be minimal.
- How do you like to bank? Do you want face to face access and a counter service, or do you prefer to do the majority of your banking online? If online is the answer, you probably won’t need to consider how close your local branch is.
- Service standards. Talk to other contractors and business contacts to see what bank they use and how happy they are with the service.
- Charges. The majority of banks are great at providing a period of free banking when you open your account, but what are the charges after that? Look at monthly service fees as well as transaction costs to work out the most cost-effective solution for you.
It’s worth noting that you’ll want to stay with your bank for as long as possible: bank hopping is an administrative nightmare if you have a lot of clients, so a little research up front will pay dividends in the long run.
Opening a business bank account for contracting
You can’t open a business account in the company name until the limited company is formed. Once you’re ready, you can apply for many business accounts over the phone or online, or you can complete the paperwork in branch instead.
The process is similar to opening a personal account, so you’ll need proof of ID, your address details (usually for the past three years), expected turnover figures and proof of company incorporation. In some cases your company UTR (Unique Taxpayer Reference) or TIN (Tax Identification Number for non-UK nationals) may also be required. Your UTR is a distinct 10-digit number that is issued by HMRC shortly after your company’s incorporation.
The business manager at the bank will run through the necessary documentation with you prior to the application process.
The account is usually opened instantaneously on acceptance of the application, with the necessary banking cards and cheque books being sent to the registered or trading address soon after. It is important that you use the business account for all the financial transactions relating to the company so that there is a robust audit trail. Keep all of your statements to audit against your accounting records, receipts and invoices.