Cash Basis or Accruals: A Choice Most Sole Traders Never Made

Until April 2024, the cash basis was something eligible businesses opted into. You checked your turnover against HMRC's limits and made a deliberate choice on your tax return.

That is no longer how the trading cash basis works.

Since 6 April 2024, cash basis has been the default method for eligible sole traders and partnerships. If you want to use traditional accounting instead, you must actively elect to do so.

The question has therefore flipped.

It is no longer:

"Should I opt into cash basis?"

It is:

"Do I have a reason to opt out?"

For many small businesses, the default works well. For others — particularly businesses carrying stock, extending significant credit or needing fuller management information — traditional accounting may still be the better fit.

Making Tax Digital adds another reason to understand the choice: your accounting records now need to be maintained digitally throughout the year, so it helps to know which basis those records are ultimately supporting.

What the two methods actually do

For ordinary trading income and expenses, the main difference is timing: not usually what counts, but when it counts.

Cash basis: income is generally recorded when the money is received and expenses when they are paid.

If you invoice a customer in March but they pay you in May, the income normally falls into the tax year in which you receive the money.

Traditional accounting, or accruals: income and expenditure are recognised according to accounting principles rather than simply when cash moves.

That means unpaid customer invoices, supplier bills, stock, accruals and prepayments may all affect the year-end profit.

A simple example

A freelance designer invoices £10,000 on 20 March 2026. The client pays on 15 May 2026.

Under traditional accounting, the income normally belongs in 2025/26 because that is when the work was done and the income earned.

Under cash basis, it normally falls into 2026/27 because that is when the £10,000 was actually received.

Ignoring payments on account and other complications, that can move the income into a different tax year.

This is one of the main attractions of cash basis for businesses whose customers pay slowly: you are generally not paying Income Tax on a trade debtor that has not yet turned into cash.

What changed in April 2024

Three important changes took effect.

Cash basis became the default

Eligible sole traders and partnerships now calculate their trading profits using cash basis unless they elect to use traditional accounting.

The turnover limits disappeared

Before April 2024, businesses generally needed turnover of no more than £150,000 to enter cash basis and could be forced out once turnover exceeded £300,000.

Those trading-income limits have been removed.

An eligible sole trader or partnership can now use the trading cash basis regardless of turnover.

The interest and loss restrictions were removed

The former £500 restriction on interest deductions under cash basis was abolished.

Cash-basis losses are also now generally subject to the same loss-relief rules as losses calculated using traditional accounting.

These changes removed two of the main historic disadvantages of cash basis.

A note for landlords

The rules above relate to trading income.

Landlords operate under a separate property cash-basis regime.

For most property businesses run by individuals or qualifying partnerships, cash basis has already been the default since 2017/18 where annual property receipts are £150,000 or less.

Importantly, the April 2024 removal of the £150,000 trading cash-basis threshold did not remove the equivalent threshold for property businesses.

So if you have both self-employment income and rental income, do not assume that exactly the same cash-basis rules apply to both.

Who cannot use the trading cash basis?

The trading cash basis is available only to eligible unincorporated businesses.

It cannot be used by:

• limited companies;
• limited liability partnerships;
• partnerships with one or more corporate partners;
• Lloyd's underwriters;
• farming businesses with a current herd-basis election;
• farming or creative businesses using the relevant profit-averaging rules;
• businesses that have claimed Business Premises Renovation Allowance within the relevant seven-year period;
• mineral extraction trades; or
• businesses that have claimed Research and Development Allowance.

There are also several specialist trades and reliefs for which traditional accounting may be required or more appropriate.

If any specialist tax regime applies to your business, check before assuming the cash-basis default applies.

When cash basis works well

Straightforward service businesses

Consultants, designers, trainers and many trades with little stock and relatively simple expenditure are often well suited to cash basis.

Businesses whose customers pay slowly

Cash basis generally avoids taxing customer invoices before the money has actually been received.

That can make cash-flow planning easier.

Businesses that value simplicity

There is normally no need to calculate year-end trade debtors, creditors, stock or work in progress purely for the cash-basis tax computation.

For a straightforward business, the bookkeeping can therefore remain relatively close to actual cash movements.

When traditional accounting may tell you more

Businesses holding significant stock

Under cash basis, stock purchases are generally reflected when paid rather than matched to the period in which the stock is sold.

That can make taxable profit fluctuate significantly between periods.

For tax purposes that may be acceptable. For understanding business performance, it may be less useful.

Businesses with substantial debtors or creditors

Cash basis focuses on amounts actually received and paid.

If customers owe you £100,000 and you owe suppliers £80,000, those balances do not automatically appear in a simple cash-basis profit calculation.

A business that needs a fuller view of what it owns and owes may therefore still want accruals-based management accounts even if cash basis is used for tax.

Businesses seeking external finance

Banks, investors and other finance providers may want accounts that show debtors, creditors, stock, assets and liabilities rather than simply a cash-basis tax profit.

Cash basis is not automatically a barrier to finance, but additional accruals-based information may be required.

Businesses with substantial work in progress

Where significant work has been performed but not yet billed or paid for, cash-basis figures may not give management a complete picture of the economic activity taking place.

Growing businesses

A business moving towards incorporation, outside investment or more sophisticated management reporting may decide that maintaining accruals records from an earlier stage is operationally more useful.

Capital expenditure needs separate consideration

Large capital expenditure is not, by itself, a reason to choose traditional accounting.

Under cash basis, the cost of many items of equipment — such as machinery, computers and vans — can normally be deducted as an expense when paid.

Traditional accounting generally deals with qualifying capital expenditure through the capital-allowances system instead.

There are important exceptions under cash basis, including special treatment for cars, land and certain other assets.

So if your business is making a significant or unusual capital purchase, check the tax treatment of the specific asset rather than assuming one accounting basis will automatically give better relief.

How to opt out — and why people miss it

The election to use traditional accounting is made through the Self Assessment tax return.

It must be made for each tax year.

If the appropriate election is not made, an eligible business falls back onto cash basis.

That creates an easy administrative trap.

You may have deliberately chosen traditional accounting last year because it suited your business. If the election is missed on the next return, you may unintentionally move back to cash basis.

And switching basis is not simply a matter of ticking a different box.

Switching between cash basis and accruals

Transitional adjustments are designed to make sure income is taxed once — and only once — and expenditure receives relief once — and only once.

For example, when moving from cash basis to traditional accounting, special rules deal with items such as:

• amounts customers already owe;
• unpaid supplier liabilities;
• stock;
• income received in advance;
• prepayments; and
• equipment previously deducted under cash basis.

The rules use a prescribed tax calculation rather than simply transferring every balance-sheet figure into the tax return.

If leaving cash basis produces positive adjustment income, that amount is normally spread for tax purposes over six tax years, although it may be possible to accelerate the charge.

If the calculation produces an adjustment expense, it is normally deducted in the first period after leaving cash basis.

Separate rules can apply to prepayments and capital expenditure.

The message is simple: do not switch accounting basis casually.

What Making Tax Digital changes

Making Tax Digital for Income Tax began in April 2026 for sole traders and landlords whose qualifying income exceeded £50,000 in 2024/25.

The threshold falls to:

• over £30,000 from April 2027, based on 2025/26 qualifying income; and
• over £20,000 from April 2028, based on 2026/27 qualifying income.

The mandatory timetable for partnerships will be introduced separately.

MTD requires affected taxpayers to maintain digital records and send quarterly summaries of income and expenses to HMRC.

But there is an important point:

A quarterly update is not a quarterly set of accounts and it is not a quarterly tax return.

HMRC does not require accounting or tax adjustments — such as accruals or prepayments — to be made before every quarterly update.

If you use traditional accounting, the necessary accounting adjustments can be dealt with when the annual totals are finalised.

So MTD does not mean preparing full accruals accounts four times a year.

What it does mean is that your bookkeeping needs to be organised digitally throughout the year. Choosing the right accounting basis therefore matters when deciding how your software and record-keeping processes should be set up.

What to do now

Find out which basis you are actually using. Check your most recent Self Assessment return rather than assuming.

Ask whether the default suits the business. Think particularly about stock, debtors and creditors, financing plans, work in progress and management-reporting needs.

If you use traditional accounting, remember the annual election. Do not assume last year's choice automatically carries forward.

Do not switch without checking the transitional adjustment. A change of basis can affect taxable profits for several years.

Keep adequate records. Self-employed business records generally need to be retained for at least five years after the 31 January filing deadline for the relevant tax year.