Tom Bransby
Content Marketing Manager
Posted 1 month ago

3 Reasons to Separate Your Business Expenses from Your Personal Expenses

bank-statement-coconut
Image credit: Adobe Stock

One bank statement.

One never-ending list of transactions.

We’ve all been there.

The fact is, 70% of all sole traders (people who run their own business as an individual and are self-employed) still use their personal account to pay for everything. And by everything, we mean EVERYTHING.

Business, pleasure, bills and everything in between; all on the same trusty (worn out) card.

This might feel like an easy option for the busy, fast-paced life of a freelancer, but it does not serve you and your business well, creating a financially unstable solution to managing your money. The good news is, it’s a very simple problem to fix.

Here’s why separating your self-employed expenses from your personal expenses is a good idea:

1. Save Time on Your Tax Return

Picture this.

It’s January, the month of the tax return. Spreadsheet open, floor covered in bank statements and receipts. A towering wall of used coffee cups blocks all natural light from the window, casting you deep in the shadows of a year-long cycle of procrastination. Your friends call. They send you messages. Photographs of how fun it is to be wild and free, enjoying life in the crisp winter sun of the new year. You fumble for your phone in the dark. It falls to the floor, instantly lost to the sea of paper. Exhausted, you lean back. Sighing in despair. A vibration can be heard from beneath your feet. Contact. Life. It stops…

‘Damn you, tax return’

doing-my-tax-return-feels-like
Image credit: Marta Altés

If you relate to this common tale of tax return woe, then we have some good news. It can be avoided with the simple act of separating your business expenses from your personal expenses.

We will demonstrate this with a game.

*****

Which of the following transactions are business expenses?

Pret a manger – £6.70
INT’L 00891248379 – £14.99
Paypal payment – £7.99
TFL Travel Ch – £2.49
The Post Office – £6.99

*****

Unless you have a photographic memory which remembers the time and place of every transaction, then the answer is unclear. We must take valuable time to decipher the bank statement code.

tax-code-solution
Image credit: The Imitation Game, Black Bear Production

Now, let’s try that again but with one key difference; every payment was made with a business account, set up especially to pay for all of your business expenses.

*****

Which of the following transactions are business expenses?

INT’L 00891248379 – £14.99
TFL Travel Ch – £2.49
The Post Office – £6.99

*****

You paid for these transactions using your business account, so the answer can only be ‘All of the above’. No code to crack. No time wasted. Simple.

Imagine if your tax return was this straightforward. One simple bank statement, safe in the knowledge that every transaction is relevant to your business.

2. Improve Cash Flow

Behold. The magnificent money mirage.

money-mirage-coconut

Tired. Hot. Sweaty. The day’s work has left you tired. Your business has just been paid and thoughts quickly turn to that well earned holiday you’ve been dreaming of. After half an hour googling with a quick check on Skycanner, you’re off to the Caribbean. Perfect. Well… not really. The rent on your workspace comes out of your account tomorrow, along with your monthly subscription to Dropbox and Adobe. Oh, and don’t forget that notification from Paypal.

Suddenly, those cheap flights don’t seem so cheap after all…

The fact is, it’s very difficult to keep track of your money when using the same account for both business and personal use.

Instead, keep your personal money separate from your business’s money and you’ll always know how much you have, making it easy to stay on top of your finances.

It’s the difference between being able to take a holiday and relax, and taking a holiday and worrying about your next bill.

financial-happiness-coconut
Image credit: Madmen, AMC

3. Keep HMRC Happy

It’s been a good year! Your work-life balance is non-existent (we’ll deal with this another time) and everyone wants to hire you! Invoices are flying out the door, money is coming in and your business is in full swing! Congrats! There’s no time for any of that tax business, none of that paperwork. It can wait. Oh, and who cares if you forget the odd receipt and don’t bother tracking that small job you did on the side… you’re busy, you’re hustling, the taxman will understand!

Wrong.

the-taxman
Image credit: The Excorcist, Warner Bros

HMRC can audit you at any time and the more mistakes you make, the more likely it is to happen.

The solution is simple. Keep your business and personal expenses separate.

Implement a system that clearly outlines your business income and expenses, and don’t cut corners. That two minutes it could’ve taken you quickly turns into hours when asked to provide paperwork and proof of earnings.

Not only this, but it could possibly open up HMRC to investigate all of your expenses and income on that personal bank account, regardless of the ones you specify are business related. Imagine having to explain that the £100 birthday income from your family and HMRC querying whether it was sales income.

Only once your business is in order will the taxman give you a high-five for doing great work. And if he doesn’t, we will.

Keep Your Business and Personal Expenses Separate 

The first step to getting ready for this new tax year is not a complicated one. It’s very simple. Keep your personal expenses out of your self-employed expenses.

Open a separate business account with a separate debit card and use that to pay for all of your business expenses.

Finding the best business account for you is now easier than ever. Gone are the days of attending countless meetings with your branch manager, photocopying a hundred years worth of paperwork and spending huge amounts of money on banking fees. Services like Coconut offer people the chance to register for a new account in a couple of minutes from the comfort of their own home using just their phone and some ID.

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