Cash Basis

The cash basis means you count income in the tax year the money actually reaches you, and expenses in the tax year you actually pay them. Since 6 April 2024 it is the default way a sole trader or a partnership of individuals calculates trading profit, there is no turnover limit of any kind, and you leave it only by electing on your Self Assessment return to use traditional accounting instead.

That short answer contains two things most other sources get wrong, so this page starts with them rather than burying them.

There Is No Turnover Threshold, and There Is Nothing to Watch

You have probably just read somewhere that the cash basis turnover limit "went up to £300,000". It did not. The thresholds were abolished, not raised.

The entry condition lived at ITTOIA 2005 s.25A, and the supporting turnover machinery lived at ss.31A to 31D. Open s.25A on legislation.gov.uk today and the text of the section reads as a row of dots, with an amendment note recording that it was omitted for 2024-25 and subsequent tax years by Finance Act 2024 Schedule 10, paragraphs 4 and 47. Paragraph 6 of the same schedule omits ss.31A to 31D. Paragraph 47 is the commencement rule: the amendments have effect for the tax year 2024-25 onward.

So there is no entry figure of £150,000, no raised entry figure of £300,000, and no exit figure at all. A sole trader turning over £1.2 million is on the cash basis by default in exactly the same way as one turning over £18,000. Eligibility now turns on two questions only: who you are (an individual or a partnership of individuals, not a company), and what trade you carry on (whether it is an excluded trade). Turnover is simply not part of the test any more.

This matters beyond pub trivia. A trader who believes there is a £300,000 ceiling will spend time each year checking a figure that does not exist, and may pay for an accruals conversion they were never required to make. Worse, a trader who crosses an imaginary line and "switches to accruals" without making the s.25C election has not actually elected out, and their return does not match the basis the law puts them on.

Why so many sources have the wrong number

Two reasons. First, an increase to £300,000 was widely discussed before the change was enacted, and a great deal of commentary was written off the consultation rather than off the Act. Second, HMRC's own Business Income Manual page on the subject has not caught up: read today it still describes the cash basis as something you elect into and still quotes the old £150,000 figure. Manual pages are guidance, not law, and a stale one does not revive a repealed section. Where the manual and the statute disagree, the statute wins, and here the statute is unambiguous because the section has been emptied out.

It Is the Default Now, Not a Scheme You Join

The live provision is ITTOIA 2005 s.24A, inserted by the same Finance Act 2024 schedule. It says that the profits of a trade for a tax year must be calculated on the cash basis unless the trade is an excluded trade in relation to that year (see s.25B), or an election under s.25C has effect for that year.

Read that as a default with two exits. You do not apply, register, tick a box to join, or qualify. If you are a sole trader and you do nothing, your profit is computed on the cash basis. The old mental model, in which the cash basis was a simplification scheme for small businesses that you opted into and grew out of, is gone in both directions: you cannot opt in, because you are already in, and you cannot grow out, because there is no size limit to grow past.

One consequence is worth stating plainly. If you have historically prepared accruals accounts because that is what your bookkeeping software does, and you have never made an election, your return and the statutory default are pointing in different directions. The fix is not difficult, but it is a positive step: make the election.

Who Can Use It, and Who Is Shut Out

The cash basis is for sole traders and partnerships where every partner is an individual. Property businesses have their own parallel cash basis rules, which this page does not cover.

Three groups are outside it entirely because of what they are:

• Limited companies. See the next section; this is the conflation that causes the most trouble.
• Limited liability partnerships.
• Partnerships with one or more corporate partners. One company in the partnership takes the whole partnership out.

Beyond that, ITTOIA 2005 s.25B defines excluded trades, which are shut out because of what they do rather than what they are. Well-known members of that list include Lloyd's underwriters, farming businesses with a herd basis election in force, businesses with a profit averaging claim in force, and businesses that have claimed business premises renovation allowance or research and development allowance. That is a set of examples rather than the complete statutory list, so if your trade is anywhere near one of them, check the gov.uk eligibility page rather than assuming from this one.

Why the cash basis does not apply to limited companies

Not because companies are too big. Because the cash basis is a rule about income tax. It sits in Part 2 of ITTOIA 2005, which charges income tax on the trading profits of individuals and partnerships. A company does not pay income tax on its trading profit; it pays corporation tax, and its profits are computed under CTA 2009 s.46(1), which requires accounts drawn up in accordance with generally accepted accounting practice. There is no cash basis switch in the corporation tax code to turn on.

The reason directors keep asking is that they have met a cash-based VAT scheme and assumed it is the same thing. It is not. The VAT Cash Accounting Scheme lets a business account for VAT on payments received and made rather than invoices issued and received, it has a £1.35 million entry threshold and a £1.6 million exit threshold, and it is open to companies. The income tax cash basis has no thresholds and is closed to companies. The two regimes overlap only in the word "cash". For the VAT scheme itself, including how those thresholds are measured, see our guide to the VAT cash basis threshold, and HMRC's Cash Accounting Scheme eligibility guidance.

Cash Basis Against Traditional Accounting: Where the Line Falls

HMRC calls the alternative "traditional accounting (accruals basis)". The statutory name for it is generally accepted accounting practice, imposed by ITTOIA 2005 s.25(1) on any trade to which the cash basis does not apply. All three labels describe the same thing. Here is where the line actually falls, in real trades.

Cash basis	Traditional accounting (accruals)
A mobile mechanic invoices £2,400 on 30 March and is paid on 12 April: taxed in the later tax year, because that is when the money arrived	The same job is taxed in the year of the invoice, whether or not the customer has paid
A hairdresser buys £900 of retail stock in March and pays the supplier in May: deducted in the later tax year	Deducted when the bill is received, and the unsold stock is carried at the year end
A window cleaner buys a £1,200 pressure washer: the full cost is an ordinary expense in the year it is paid, with no pool and no annual investment allowance	The cost goes into the capital allowances regime, claimed as annual investment allowance or written down allowance
A driving instructor buys a car: still capital allowances, because a car is the one surviving exception (CAA 2001 s.1A(4))	Same treatment, capital allowances by CO2 band
A builder with a £40,000 unpaid invoice from a collapsed developer: never taxed on it at all, because it was never received	Taxed on the invoice when raised, then a separate bad debt write-off once the debt is shown to be bad
A cafe owner at the year end: no stock count required for tax, because the s.25(1) GAAP rule is switched off	Closing stock is valued at the lower of cost and net realisable value, moving cost into the year of sale

Read the left column as a rule of thumb about who the cash basis suits: trades that get paid slowly, trades whose customers sometimes do not pay at all, trades that buy equipment outright, and trades with no meaningful stock. Read the right column as who accruals suits: trades carrying real stock or work in progress, trades that want their accounts to match the work done rather than the bank statement, and anyone who needs accounts a lender or a buyer will take seriously. Our page comparing the two in depth, cash basis vs accruals for sole traders, works the same trader's profit under both and covers the transition adjustments when you switch.

What Changes in Practice

The practical effect of the cash basis is entirely about timing. Over the life of a business the same total profit is taxed either way. What moves is which tax year it falls in, and that is decided by the bank statement rather than the invoice book.

Income

Income is recognised when the money is received. For a card-paying retail trade that is very close to the moment of sale. For a trade invoicing on 30-day terms, it lags by a month or more, which means roughly a month of turnover permanently sits in the next tax year compared to accruals. Money received in advance counts when it arrives: a deposit taken in March for a job done in June is March income.

Expenses

Expenses are recognised when they are paid. A supplier bill sitting unpaid at 5 April gives no deduction this year. A year's insurance paid up front in March is deducted in full in March, with no apportionment over the policy period. The ordinary wholly and exclusively test still applies, and the ordinary disallowables (entertainment, private use, fines) are still disallowed. The cash basis changes when a cost is deducted, not whether it is deductible. Our allowable expenses checklist for sole traders covers the what.

No stock, no debtors, no creditors

Because the GAAP rule at s.25(1) is disapplied, there is no year-end stock valuation, no debtor listing and no accruals or prepayments schedule. For many one-person trades that removes most of what made the year end an event. It is also why a manufacturer that wants absorption costing to drive its tax number has to be on traditional accounting.

The Three Old Drawbacks That Are Gone

Advice written before April 2024 gave three reasons to elect out of the cash basis. All three have been repealed, by the same Finance Act 2024 schedule, on the same day.

• The £500 interest cap. ITTOIA 2005 s.51A capped the deduction for interest and finance costs at £500 a year for cash basis businesses. It was omitted from 6 April 2024 by Schedule 10 paragraphs 7(a) and 47. Interest is now deductible under the ordinary wholly and exclusively rules, the same as on accruals. For a trader with a business loan or significant finance costs, this was often the single reason to elect out, and it has gone.
• The loss relief bar. ITA 2007 s.74E blocked sideways and carry-back relief for a loss computed on the cash basis, leaving carry forward against the same trade as the only option. It was omitted from 6 April 2024 by Schedule 10 paragraphs 8(a) and 47. Cash basis losses now qualify for the ordinary reliefs, subject to the general loss relief rules and caps. Our page on cash basis losses for sole traders takes that further.
• The thresholds. Covered above. Nothing to monitor, nothing to grow out of.

What is left of the old case against the cash basis is genuinely narrow: stock-heavy businesses, businesses whose accounts have to satisfy a lender or a buyer, and businesses whose profit profile is badly distorted by payment timing.

Capital Spending on the Cash Basis

This is the part that surprises people, because it is more generous than it sounds and has one sharp exception.

Under CAA 2001 s.1A, a person using the cash basis is not entitled to any capital allowance except in respect of expenditure on a car. Instead, ITTOIA 2005 s.33A lets capital expenditure be deducted as an ordinary expense when it is paid, subject to an excluded list. The excluded list includes cars, land, buildings, non-depreciating assets, financial assets such as shares, non-qualifying intangibles, and expenditure on acquiring or disposing of a business or part of a business.

So for the van, the tools, the laptop, the machine and the office furniture, the answer is simple: deduct the cost in the year you pay it. There is no pool, no writing down allowance and no annual investment allowance. Do not describe it as claiming AIA on the cash basis, because that is not the mechanism, and the distinction matters if the asset is later sold.

For a car, you stay in the capital allowances regime, with the rate set by CO2 emissions, or you use HMRC's approved mileage rates instead. Our page on sole trader capital allowances handles the car rules and the rates properly.

Electing Out Into Traditional Accounting

If accruals suits your business better, ITTOIA 2005 s.25C is the route. You elect for the profits of the trade to be calculated in accordance with generally accepted accounting practice, and you make that election on your Self Assessment tax return. The election has effect for the tax year for which it is made and for subsequent tax years, until you revoke it or the trade becomes excluded.

Two practical points. First, this is a positive act: preparing accruals accounts and filing the resulting figure is not the same as electing, and your return needs to say which basis you used. Second, check the filing deadline that applies to your own return on gov.uk before relying on it. The time limit is not stated on the face of s.25C and we will not guess at one here.

Switching in either direction triggers one-off transition adjustments so that nothing is taxed twice or relieved twice. Those mechanics live on the cash basis vs accruals page.

Worked Example One: The Year End Timing Swing

Tom runs a plumbing and heating business as a sole trader in Bristol. He works to the tax year ending 5 April 2027, and his year has been a good one.

• He invoices £81,000 during the year. Of that, £11,500 invoiced in late March 2027 for two boiler installations is still unpaid at 5 April 2027.
• He banks £3,200 in April 2026 from an invoice raised in March 2026, in the previous tax year.
• Merchants bill him £26,000 during the year. Of that, £4,300 on a March 2027 statement is unpaid at 5 April 2027.
• He pays £1,800 in April 2026 for a March 2026 merchant statement.

On traditional accounting, his income for the year is what he invoiced, £81,000, and his expenses are the costs relating to the year, £26,000. Taxable profit is £55,000. The unpaid £11,500 sits as a debtor and the unpaid £4,300 sits as a creditor.

On the cash basis, his income is what reached the bank: £81,000 less the unpaid £11,500, plus the £3,200 carried in from the previous year, so £72,700. His expenses are what left the bank: £26,000 less the unpaid £4,300, plus the £1,800 carried in, so £23,500. Taxable profit is £49,200.

Same trader, same year, £5,800 of difference. The interesting part is not the size of the gap but where it sits. The accruals figure of £55,000 is above the £50,270 higher rate threshold, so £4,730 of Tom's profit would be taxed at 40% plus 2% Class 4 on the slice above the upper profits limit. The cash basis figure of £49,200 is below the threshold entirely, so the same slice is taxed at basic rate. He has not avoided anything: the £11,500 will be taxed in 2027/28 when the customers pay. He has moved it into a year where it may sit in a lower band, and he has not paid tax on money he does not yet have.

Run this the other way and the point still holds. If Tom's next year is quiet and the £11,500 lands on top of a thin year, the cash basis has done him a favour twice. If his next year is his best ever, the deferred income stacks on top of a high year and the timing works against him. Timing is a tool, not a discount.

Worked Example Two: A Tool Bought, Then Sold

Priya is a self-employed joiner. In June 2026 she buys a mitre saw and dust extraction setup for £1,200, paid on the day.

Year one. On the cash basis the whole £1,200 is an ordinary business expense in 2026/27, because s.33A treats capital expenditure that is not on the excluded list as deductible when paid. There is no pool, no writing down allowance, and no annual investment allowance claim to make. If her profit before this was £34,000, it is now £32,800. At basic rate income tax of 20% plus Class 4 National Insurance, the deduction is worth a little over £300 of tax in that year.

Year three. In 2028/29 she upgrades and sells the old saw for £300. Because she deducted the full cost as an expense, the £300 comes back in as a business receipt in the year she receives it. There is no balancing charge calculation and no disposal value to knock off a pool, because there never was a pool. It is simply £300 of income in 2028/29.

Net over the three years she has deducted £1,200 and brought back £300, so £900 of net relief, which is the real cost of the asset to her business. The mechanism is different from capital allowances but the destination is the same. Where it differs sharply is the year one cash flow, because the full cost lands immediately rather than being written down.

Note the exception one more time: had Priya bought a van, the same full deduction applies, because a van is not a car. Had she bought a car, none of this would apply and she would be in the capital allowances regime or on approved mileage rates.

What People Get Wrong

"The cash basis threshold went up to £300,000"

The single most repeated error on this subject, and the reason this page exists. The thresholds were abolished. ITTOIA 2005 s.25A and ss.31A to 31D were omitted from 6 April 2024 by Finance Act 2024 Schedule 10 paragraphs 4, 6 and 47. There is no entry figure and no exit figure. If a source quotes you £150,000, £300,000, or any other turnover number for the income tax cash basis, that source is describing law that no longer exists.

"I need to elect into the cash basis"

Backwards since 6 April 2024. The election is the one that takes you out, under s.25C. Doing nothing leaves you on the cash basis.

"My company uses the cash basis"

It does not, and it cannot. What the company may be using is the VAT Cash Accounting Scheme, which is a different regime with its own thresholds. Company trading profits are computed under generally accepted accounting practice because CTA 2009 s.46(1) says so.

"I can claim the annual investment allowance on the cash basis"

No. Capital allowances are switched off by CAA 2001 s.1A except for cars. The equipment deduction comes from s.33A instead, as an ordinary expense when paid. The outcome often looks similar in year one; the mechanism is different and it matters on disposal.

"The cash basis blocks loss relief and caps my interest at £500"

Both of those restrictions were repealed on 6 April 2024. Advice that still carries them is describing the pre-2024 regime.

"I write off my bad debts under the cash basis"

There is nothing to write off. An unpaid invoice was never income, so a customer who never pays has already cost you nothing in tax. Claiming a bad debt deduction on top would be deducting the same money twice.

"Cash in the bank at 5 April is my profit"

It is not. The cash basis governs when income and expenses are recognised, not what counts as income or as a deductible expense. Drawings are not an expense, a loan drawn down is not income, capital introduced is not income, and private use still has to come out. The wholly and exclusively test applies unchanged.

Where to Go Next

• Cash basis vs accruals for sole traders: the same trader's profit under both bases, the transition adjustments, and the Making Tax Digital angle.
• Cash basis sole trader losses: how the reliefs work now the restriction has gone.
• Sole trader capital allowances: cars, CO2 bands and the accruals treatment of equipment.
• Allowable expenses for sole traders: what is deductible, before you worry about when.
• Working with an accountant on cash accounting: what the year end looks like in practice.