How to separate your personal and business finances
Discover how to differentiate your business and personal spending with these eight practical tips.
A key part of running a business is staying on top of your business finances. Not only does this help when submitting your company accounts to HMRC, but it also increases the likelihood of your operation succeeding.
To keep things simple, it’s important to keep your personal and business finances entirely separate. This reduces the risk of confusion and gives you a clearer picture of how your business is performing.
Key takeaways
Open a separate business account to keep all income and expenses relating to your business in one place
Pay yourself a set amount and then try to avoid dipping into business funds for personal spending
Keep clear records and track everything so you stay tax compliant while knowing exactly how cash flow looks month to month
Keep personal and business finances separate with our best business bank accounts
Eight ways to separate your personal and business finances
Here are eight top tips for keeping your personal and business finances separate:
1. Open separate bank accounts
As a first step, you can open a business bank account for all your business spending and expenses. Doing so makes it easier to differentiate between your business spending and your personal spending.
Even though sole traders and partnerships may be able to use a personal bank account for business purposes, there are several advantages to opening a dedicated business account.
Many business bank accounts work with accountancy software, which can streamline invoicing and tax. Many also include features such as business support, which can benefit your company.
You could even consider opening multiple business bank accounts and using them for different purposes. You might have one for future tax payments, for instance, another for collecting income, and another for dealing in different currencies.
2. Track your expenses
Having a separate business bank account can assist you with tracking expenses and help you maintain a spotless financial record. But things can become more complicated if you have shared personal and business expenses.
For instance, you might use your personal car for business-related purposes, or you might run your business from home, in which case a proportion of your energy costs are for work purposes.
Because you may be able to deduct some of these business costs from your profits to reduce your tax bill, it’s helpful to keep accurate records of these expenses and keep hold of all your receipts to prevent a financial headache later on.
3. Pay yourself a salary
As a business owner, you can pay yourself a salary each month by transferring cash from your business account to your personal account. This makes it easier to stay within your budget as it prevents you from dipping into your business account whenever personal costs arise.
Businesses structured as sole traders or partnerships can set up standing orders to transfer a set amount into your personal account each month. If you’re a limited company, you must pay your salary through PAYE.
4. Get a business credit card
Applying for a business credit card makes it easier for you to track business expenses. Relying on your personal credit card for business purposes can quickly cause confusion.
A business credit card can be useful if unexpected expenses occur, and it can also enable you to build a business credit rating. In addition, you can often give business credit cards to employees to cover business expenses, which you can then easily monitor and track.
5. Get a business loan
Borrowing through a loan can give you the funds you need to help your business expand, buy new equipment and invest in new premises.
Although some lenders allow you to use a personal loan for business purposes, it’s often better to use a business loan to keep your finances separate.
If you’re operating as a limited company, borrowing through a business loan enables you to build business credit. It also means you won’t be personally liable for the loan repayments if your business can’t meet them, which isn’t the case if you take out a personal loan. By using a business loan, your personal credit score remains unaffected.
This doesn’t apply to sole traders. The law regards you and your business as one - meaning you remain personally liable for any debts. It’s a similar situation in a partnership, although in this case responsibility for the debt is split between business partners.
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6. Set a budget
Setting a strict budget for your business based on your current earnings can reduce the chances of you dipping into your personal funds whenever your business faces a shortfall. This can prevent the lines between personal and business expenditure from becoming blurred.
7. Don’t use business funds to pay for personal expenses
Just as you should avoid using personal funds to cover business shortfalls, you may also want to resist the urge to dip into your business funds to pay for personal expenses, even if you are the sole owner of your company.
8. Seek financial advice
Finally, it can be a good idea to speak to a financial adviser or accountant. This can prevent you from making mistakes in your tax returns and accounts. It also helps ensure you’re following the rules and can even uncover new ways to manage your business finances.
Why is it important to separate personal and business finances?
Keeping your personal and business finances separate sets a clear boundary between you and your business. It helps you track performance properly, make better decisions and avoid conflicts between personal and business spending. In some cases, it may even protect you from being personally responsible for business debts.
It also keeps your finances organised day to day. When everything sits in the right place, you avoid confusion and reduce the risk of errors - especially when it comes to filing your tax return.
Separating your finances helps you to:
Track your business performance clearly without personal spending getting in the way
Stay organised and make tax returns quicker and easier to complete
Reduce the risk of errors and costly mistakes
Keep your personal and business responsibilities clearly defined
Protect yourself from personal liability in some situations
About Rachel Wait
Rachel has spent the majority of her career writing about personal finance for leading price comparison sites and the national press, including for the Mail on Sunday, The Observer, The Spectator, the Evening Standard, Forbes UK and The Sun.