Managing Your Cash Flow

5 reasons to keep your business and personal finances separate

6 min read

07 September 2015

When you're starting a business, it can be tempting to run all your finances through your personal bank account. Here's why you shouldn't.

While the idea of managing your business cash in the same place as your personal finances may sound like it’d 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. You’ll 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 that’s already been taxed as part of your business income. 

If you do this, you’ll 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. It’s 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.

That’s 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, you’ll 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.

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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, you’ll end up reducing your tax bill too far – and that’s the kind of error that HMRC takes a very dim view of.

If you underpay your tax, you’ll 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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4. Your business cash will be safer

Using one bank account for all of your personal and business finances means that you run the risk of losing track of how much money you have for each purpose. 

So, for example, on first glance you may think your bank balance is healthy enough to purchase something that you want for yourself (e.g a state-of-the-art TV) but you may find you need that cash in a couple of months’ time to pay a business tax bill.

By having separate accounts you’ll avoid any cash flow problems that may arise from accidentally spending business money on personal purchases.

5. You’ll look more professional to your customers

Don’t just think about what’s easiest or most beneficial for you when deciding what bank account to use for your business finances – you also need to consider your customers.

Think about how they will feel about making payments to your own personal bank account or to one in your business name, and which will make you look more like a “serious” business owner.

No matter how small your business is, your customers want to be certain that you will provide them with a top-notch service, deliver what you promised on schedule, and be there to resolve any queries. Paying into a bank account in your own name may make your customers feel that they’re not dealing with a “real” business, so don’t give them any reason to doubt your credentials or professionalism.

Setting up a dedicated business bank account is a very sensible move if you’re running a small business. Not only will it provide you with extra security and protection for your finances – as it’s more difficult to mistake your business money for your personal funds – but you’ll also have clearer, more understandable records of the money coming in and out of your business. And that could be invaluable when it’s time to complete your Self Assessment tax return.

Emily Coltman FCA is chief accountant at FreeAgent.