Sole trader bank accounts

A sole trader bank account is a type of business account designed for self-employed individuals who run their own business. It functions much like a personal current account, but often includes features designed for business needs such as invoicing tools, transaction categorisation and integrations with accounting software.

Although some self-employed individuals can manage with a personal bank account, opening a dedicated business account can make financial management easier by improving tax efficiency and presenting a more professional image to clients and suppliers.

There’s no legal requirement for sole traders to open a separate business bank account in the UK. Unlike limited companies, sole traders and their businesses are considered the same legal entity for tax purposes, so you can use a personal bank account for business transactions.

However, a dedicated business account can be highly beneficial, especially as Making Tax Digital (MTD) expands to more taxpayers from April 2026. Business accounts can help you manage finances more efficiently, stay professional, and access tools that support growth.

How a business account can help

Easier financial management - Separating personal and business finances simplifies tracking income and expenses, making self-assessment tax returns and MTD updates easier.

Professionalism - Clients and suppliers see payments and invoices coming from a business account, which can enhance credibility.

Business banking features - Many accounts include invoicing tools, expense tracking, and integrations with accounting software, which can be helpful as your business grows.

Access to business credit - Banks often require a business account to apply for loans or credit cards.

Deposit protection

Eligible deposits are protected under the Financial Services Compensation Scheme (FSCS), currently up to £120,000 per eligible person, per authorised bank, giving you added peace of mind.

With MTD set to expand over the next few years, more sole traders will be required to keep digital records and submit their tax returns using compatible software. As a result, many providers are starting to build bookkeeping and tax tools directly into their business bank accounts.

Some now include features like automatic expense categorisation, receipt capture, invoicing, and tax estimates, while others offer integrations with accounting software. These tools can save time and make it easier to track what you owe throughout the year, rather than scrambling at deadline time.

That said, not every built-in solution will suit every business. Always check that any software you use is recognised by HMRC and provides the level of support your tax affairs require before relying on it.

The biggest advantage of a business bank account is that it keeps your personal and business finances separate. But that’s just the start.

Many business accounts come with additional features that can save you time, streamline your financial management, and help you stay on top of your cash flow.

Useful features

• Accounting software integration: Sync your account with FreeAgent, Xero, or QuickBooks to automatically import transactions and simplify bookkeeping.

• Automated tax savings: Set up rules to put aside a percentage of each transaction for tax, so you're always prepared for HMRC payments.

• Multi-user access: Grant access to team members or your accountant, making collaboration easier.

• Invoice tracking tools: Stay on top of payments with automated invoicing features.

• Budgeting and expense tracking: Categorise transactions and create budgets to keep your spending in check.

• Instant UK bank transfers: Send and receive payments instantly within the UK.

• 24/7 customer support: Many business accounts offer round-the-clock assistance when you need it.

Digital banking

If you're a sole trader looking for a cost-effective banking solution then app-based or digital banks might be the way to go. Many offer business accounts with no monthly fees and a range of innovative features, such as:

• Instant payment notifications: Get real-time alerts for every transaction.

• Spending insights: Tools to help you analyse your business expenses.

• Digital receipts: Easily store and organise receipts without the paper clutter.

• Cost-compartmentalisation: Some accounts let you set up virtual ‘pots’ to separate different expenses, such as tax savings or operational costs.

If you’re a sole trader, opening a dedicated business bank account comes with several advantages, but there are also some potential drawbacks to consider. Here’s a breakdown of the key pros and cons:

Pros

• Shows professionalism and credibility: A business bank account signals to clients and customers that you’re serious about your business, helping to build trust when making and receiving payments.

• Keeps business and personal finances separate: Using a personal bank account for business transactions can make bookkeeping more complicated than it needs to be. A separate account ensures clear financial records, helping you track your business’s financial health more easily.

• Gives access to features designed for businesses: Many business accounts offer useful tools, such as accounting software integrations, invoicing features, payroll management, and business overdraft facilities.

• Simplifies tax management: A dedicated account makes it easier to track income and expenses, ensuring accurate tax returns and, if applicable, keeps you compliant with new Making Tax Digital rules. It can also streamline claiming business expenses and providing clear documentation if HMRC requests any proof of transactions.

Cons

• Comes with additional fees: Many business accounts charge monthly or annual fees, as well as transaction and overdraft fees. These costs can add up, particularly for smaller businesses.

• May take longer to set up: Unlike personal accounts, business accounts often require extra documentation, such as proof of business activity, which could potentially delay the setup process. 

• Doesn’t necessarily eliminate financial confusion: Even with a business account, sole traders remain personally liable for business debts. If you're not careful, mixing personal and business transactions can still happen.

• Involves extra admin: Managing multiple accounts requires more effort. If your business transactions are minimal, the added administration might not be worth it.

Opening a business bank account as a sole trader is generally a straightforward process, but you need to have the right documents ready and understand the steps involved. 

Documentation

Most banks will ask for the following:

• Proof of identity: A valid passport or driving licence

• Proof of address: A recent utility bill, bank statement, or council tax bill.

• Proof of business activity: This could be a tax return, invoices, or a business website to show that you're actively trading.

• Business details: Your business name, nature of work, and expected turnover

Some banks may ask for additional documents, so check the specific requirements before applying.

Steps to apply

Opening a bank account is relatively simple, as long as you do things in the right order and have everything to hand.

• Compare accounts: Research different banks and digital providers to find the best fit for your needs

• Gather your documents: Ensure you have all the necessary paperwork before starting the application

• Apply online or in-branch: Most banks allow you to apply online, though some may require a visit to a branch

• Verification checks: The bank will review your identity, business details, and financial background

• Approval and setup: If approved, you’ll receive your account details and can start using your business bank account