While the idea of managing your business cash in the same place as your personal finances may sound like itd make life easier, the reality is that it is actually a very risky strategy littered with potential pitfalls.
HMRC strongly recommends that business and personal finances are kept separate and by not doing so, you could see damaging repercussions for your business in the long run.
Here is why keeping your business and personal finances separate is a smart move.
1. Youll exclude non-taxable or taxed income
If you mix your business and personal finances in a single bank account, you may accidentally count non-taxable income (e.g. cash gifts from your family) or income thats already been taxed as part of your business income.
If you do this, youll end up paying more tax than you owe which means you and your business will have less money than you should and you may face cash flow problems further down the line.
To avoid this scenario, set up bank accounts that you can pay your business and personal income into separately.
2. Its easier to include all the right costs in your tax return
If you try to pay both your business and personal costs out of one bank account, you may miss out some business costs when you come to add up the figures for your tax return.
Thats because when you’re looking back at bank transactions from earlier in the year, it’s difficult to tell what individual purchases were actually for. Payment to Tesco could have been for your weekly shopping, for example, or it may have been for buying stationery and some box files to store your business paperwork.
If you omit business costs from your tax return, youll pay too much tax because your profit figure will be higher than it needs to be. Keep all of your business costs separate and you won’t confuse them with personal expenditure.
Read more about SME banking:
- From Metro Bank to Mondo: A look at the prospects of Britian’s challenger banks
- Making switching simple for small businesses
- SMEs shun high street bank accounts blaming “sneaky” fees and charges
3. you’re less likely to include the wrong costs in your tax return
In addition to missing out the important costs mentioned above, using one bank account for all your business and personal spending means you may accidentally include non-business costs in your tax return. If you do this, youll end up reducing your tax bill too far and thats the kind of error that HMRC takes a very dim view of.
If you underpay your tax, youll have to make up that shortfall next tax year and that means it could be a lean time for your business. You may also be charged interest and face penalties for paying too little tax, which could put your business at risk.
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