5 reasons to keep your personal and business finances separate

The temptation is clear: using your personal bank account for your business dealings will simplify life with just one set of figures to reconcile each month, right? Not really! There are five key reasons for keeping these accounts strictly separate.

1. Credibility
Imagine you are a client. How would you view someone who asked for payments to what is clearly a personal account? You might well assume that the payee provided goods or services as a profitable hobby or sideline rather than as a properly-constituted business.

Remember that taking the time to set up a business account shows clients and other contacts that you are willing to do the necessary paperwork, are organised, and are financially stable enough to be entrusted with a business cheque book and payment card.

2. Clarity
It is crucial for small businesses to monitor their finances closely and frequently so that you can detect trends, assess progress towards your goals, and be alerted to red flags. This task becomes that bit more challenging when you have to distinguish business transactions from your weekly Tesco shop. The other issue is that a combined account might give you an unrealistic overview of the health of your business finances; in turn, this can lead you into serious difficulties.

3. Safety
At first glance, this might sound slightly strange, but did you know that business advisers suggest keeping two distinct accounts in case one of them is the subject of a cyberattack or fraud and is either emptied or suspended by the bank?

In this case, you will still have access to funds in the other account. This can be crucial when you are running a business and have regular bills and expenses that simply must be paid.

4. Simplicity
When you engage an accountant to prepare your annual returns, their job will be made immeasurably easier if they do not have to untangle a year’s personal and business transactions; for example, if you have dealings with a company in both your private and professional capacities, it would be extremely difficult for an accountant to distinguish a business expense from a personal outgoing. This is not just a matter of convenience; as we highlight in the next point, it can be a matter of legality.

5. Legality
Perhaps the single-most important reason for separating your business and personal accounts is that you will probably avoid falling foul of Her Majesty’s Revenue & Customs (HMRC). When completing your tax returns, you need to be as accurate as possible, including and excluding the right items so that HMRC can make the correct assessment of your tax liability.

If you have maintained separate bank accounts, you are significantly less likely to confuse private and business income and expenses; for example, you might inadvertently include a gift as business income with a single account. As a small business owner, you probably need every penny and will want to avoid paying too much tax; conversely, you will want to avoid incurring the formidable wrath of the HMRC by paying too little tax!