Personal finance vs business finance: How to keep your accounts separate (2024)

Getting organised when it comes to your finances is an important part of running a successful business. However, many self-employed small business owners fall into the trap of using their personal current account to run the operation, which means that their personal and business expenses become intertwined.

This article will explain how to keep your personal finances separate from your business, by looking at the following areas:

● Why personal and business finances should be kept separate

Tips for how to keep your personal and business finances apart

Why personal and business finances should remain separate

Unless you are registered as a limited company, you are not legally required to open a separate business account. However, here’s why we highly recommend that you do:

1. Easier cash flow monitoring

To keep a business in good financial health, cash flow management is vital. This becomes more challenging when your personal transactions are mixed in with business funds.

To get a clear picture of what your cash flow really looks like, this would likely involve the painful combination of data entry and spreadsheets. Mixing business and personal expenses can also keep problem areas hidden, preventing you from finding ways to improve your bottom line and grow your business.

2. Save time and money on bookkeeping

When you mix your personal and business expenses, bookkeeping can take longer to manage. Trying to account for and distinguish between different types of spending is a drain on your precious time as a sole trader. If you are paying an accountant by the hour, asking them to differentiate between personal and business transactions will quickly rack up a big bill.

3. Reduces your tax bill

Separating business and personal expenses will help you claim back your allowable business expenses – and effectively pay less tax. This applies to sole traders, self-employed people and limited companies.

Deductible expenses become harder to identify when they are mixed in with personal bills. The situation worsens if you wait until the end of the month – or worse, tax year – to categorise your expenses. You might even mistake personal expenses for business costs, which could result in penalties from HMRC if you are audited.

4. Stay compliant and avoid penalties from HMRC

According to HMRC, sole traders and the self-employed must keep records for five years after the 31 January submission deadline of the tax year. Limited companies are required to keep business expense receipts for six years.

However, printed receipts are easy to lose, especially when they’re mixed up with personal receipts. If your business has lots of expenses then six years’ worth of records is a great deal of paperwork.

The Countingup business account and app enables you to make payments, automatically categorises business expenses, and reminds you to take a picture of your receipts as soon as you’ve bought something. This removes the hassle of organising your receipts and updating spreadsheets.

Tips for how to keep your personal and business finances apart

Here are some of the best ways to separate your finances and keep it that way:

Set up as a limited company

Depending on your business, it may benefit you to run it as a limited company. Unlike a sole trader arrangement, a limited company is a separate entity from its owners. All assets and liabilities are treated separately from the shareholders’ and owners’ finances.

Operating as a limited company may bring tax benefits, and you’ll also have the reassurance of limited liability. This means you won’t be personally responsible for any of the business’s financial losses or debt, and your personal assets cannot be seized to pay them.

Open a bank account and get a card

This is the most important step towards having separate personal and business finances, so if you haven’t already, open a business current account that allows you to have a card.

It will become simple to use your company card for business expenses and protect your personal cash from any unforeseen business expenses. If you’re strict about using this account for business purposes only, then it will be easy to see an accurate picture of your business income and spending.

Pay yourself a salary

Make it a regular thing to pay yourself a salary from your business bank account into your personal one. If you’re currently using one account for both personal and business, this is a step in the right direction towards separating your business money from your personal cash. It also saves you from dipping into either fund accidentally.

Set a budget

Just as you don’t want to take more money out of your business than you can afford, you also don’t want your business to pull more money from you than your personal finances can afford. It’s common for entrepreneurs to use their own cash to bump up the business cash flow, which you may have to do at some point. Setting a budget for your business will reduce the likelihood of having to do that, and it will be easier to keep your personal money separate from that of the company.

You can read more about how to set effective budgets here.

Use helpful tools

Finding tools that help you manage your business finances will save you a lot of time when it comes to accounting admin and bookkeeping. Using an account and app like the one that Countingup provides gives you structured reports and insights about your current financial health and tax estimates and automatic categorisation of your business expenses.

Using an app like this will eliminate a lot of the issues you may have encountered when running your business and personal finances from the same account.

Make financial management simple with Countingup

By setting up a Countingup business current account, you can keep your personal and business expenses separate, and manage all your financial data in one place. The app comes with free built-in accounting software that automates the time-consuming aspects of bookkeeping and taxes. You can view real-time insights into your business’s finances, including profit and loss statements, and you’ll be able to create and send invoices in seconds.

Save yourself hours of accounting admin so you can focus on growing your small business. Find out more here.

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Why personal and business finances should be kept separate

Keeping personal and business finances separate is crucial for several reasons:

  1. Easier cash flow monitoring: Mixing personal and business transactions can make it challenging to track and manage cash flow effectively. By separating personal and business finances, you can get a clear picture of your business's financial health and identify areas for improvement.

  2. Save time and money on bookkeeping: When personal and business expenses are mixed, bookkeeping becomes more time-consuming and complex. Distinguishing between different types of spending can be a drain on your time as a sole trader. Additionally, if you hire an accountant, asking them to differentiate between personal and business transactions can lead to higher costs.

  3. Reduces your tax bill: Separating business and personal expenses allows you to claim back your allowable business expenses and potentially pay less tax. When personal and business expenses are mixed, it becomes harder to identify deductible expenses. Waiting until the end of the month or tax year to categorize expenses can lead to confusion and potential penalties from tax authorities.

  4. Stay compliant and avoid penalties: According to HMRC, sole traders, self-employed individuals, and limited companies must keep records of their expenses for a certain period. Mixing personal and business receipts can make it easy to lose track of important records, potentially leading to compliance issues and penalties.

Tips for how to keep your personal and business finances apart

To keep your personal and business finances separate, consider the following tips:

  1. Set up as a limited company: Depending on your business, operating as a limited company may provide benefits such as tax advantages and limited liability. As a separate legal entity, a limited company's finances are treated separately from the owners' personal finances.

  2. Open a bank account and get a card: Opening a business current account that allows you to have a separate card is crucial for separating personal and business finances. Using a dedicated business account for expenses and income makes it easier to track and manage your business's financial transactions.

  3. Pay yourself a salary: Regularly paying yourself a salary from your business bank account into your personal account helps separate your personal and business money. This practice also prevents accidental dipping into either fund.

  4. Set a budget: Establishing a budget for your business helps ensure that you don't take more money out of your business than you can afford. It also reduces the likelihood of using personal funds to cover business expenses. A budget helps keep personal and business finances separate and promotes financial stability.

  5. Use helpful tools: Utilize tools that can assist you in managing your business finances effectively. Accounting apps like Countingup provide features such as automatic categorization of expenses, real-time insights into your financial health, and simplified bookkeeping and tax estimation.

By following these tips, you can maintain clear separation between your personal and business finances, leading to better financial management and compliance.

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Personal finance vs business finance: How to keep your accounts separate (2024)
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