Cash Basis vs Accruals Sole Trader: Which Accounting Method Should You Use?

Cash Basis Is Now the Default, Not an Option You Choose

The single most misunderstood fact about sole trader accounting: since the 2024/25 tax year, the cash basis is the default. You do not opt in to it. If you file a Self Assessment return as a sole trader or as a partner in an ordinary partnership, HMRC calculates your trading profit on the cash basis unless you elect to use accruals, which HMRC calls traditional accounting.

Three other things changed from 6 April 2024, and plenty of older guides still get them backwards:

• The turnover limits were abolished. The old £150,000 entry and £300,000 exit thresholds are gone. An eligible business of any size can use the cash basis.
• The £500 cap on deducting interest was removed. Interest is now deductible in full if it is incurred wholly and exclusively for the trade, matching the accruals treatment.
• The loss restriction was removed. Cash basis trading losses can now be set sideways against general income or carried back, just like accruals losses.

So the question is no longer "am I small enough for the cash basis?" It is "should I elect out of it?" This article works through both bases with the same trader's numbers, the exclusions, the switch mechanics and the Making Tax Digital angle, so you can answer that for your own business.

What Each Basis Means

The cash basis records income when it arrives in your bank account and expenses when you pay them. Not when you issue an invoice or receive a bill. If the cash is in, it is income; if the cash is out, it is an expense.

The accruals basis (traditional accounting) records income when you invoice and expenses when the bill relates to the period, regardless of when the money moves. It matches income to the work done and requires you to track debtors (money owed to you), creditors (money you owe), stock, prepayments and work in progress.

Both are recognised bases of assessment for self-employment income. The difference is purely timing: over the life of the business the same total profit is taxed, but individual years can look very different, and that is where the tax planning lives.

Cash vs Accrual Basis of Accounting: The Same Choice, in General Terms

Before the UK tax rules narrow it, cash vs accrual basis of accounting is a general accounting question, and it has the same answer everywhere: the cash basis recognises a transaction when money moves, the accrual basis recognises it when the underlying economic event happens. A sale made in March and paid for in May is March revenue on the accrual basis and May revenue on the cash basis. Nothing about the transaction changes. Only the period it is reported in changes.

That is why the accrual basis is what every set of published accounts uses. Accruals answers "what did this business earn and consume in this period", which is the question a lender, an investor or a buyer is asking. The cash basis answers "what did this business receive and pay in this period", which is the question a small unincorporated trader and HMRC are usually asking. Both are honest; they answer different questions.

In the UK, who gets to pick is decided entirely by legal form, never by size. The general concept splits into a statutory rule here, and the split runs straight down the line between unincorporated businesses and companies.

Free to use the cash basis	Must use traditional accounting (accruals)
A sole trader mechanic, at any turnover, because there is no limit of any kind	The same mechanic's business after incorporating: a company computes profits under generally accepted accounting practice (CTA 2009 s.46(1))
A partnership of two individuals running a salon	The same partnership once a company joins it as a partner
A self-employed window cleaner with £500,000 of turnover	A limited liability partnership, whatever its size
A florist trading as a sole trader	A florist company, and any excluded trade under ITTOIA 2005 s.25B, such as a business that has claimed research and development allowance

If you run a limited company, there is no choice to make

This is the paragraph most general searches actually need. A limited company cannot use the cash basis, and the reason is not that it is too big. The cash basis 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 the profits to be calculated in accordance with generally accepted accounting practice. There is simply no cash basis switch in the corporation tax code to turn on, at any turnover, for any company. A company's accounts follow an accounting standard, and the accrual basis is built into every one of them.

So a director asking "should we be on cash or accruals?" is asking a question that has already been answered by the decision to incorporate. The live questions for a company are which accounting standard its accounts are prepared under and how tightly its management figures track them, not which basis of assessment applies.

The VAT Cash Accounting Scheme is a different thing

Almost every company director who believes their company is "on the cash basis" has met the VAT Cash Accounting Scheme, which lets a business account for VAT on payments received and made rather than on invoices issued and received. It is a VAT scheme, it is open to companies, and it still has thresholds: you can join where estimated VAT taxable turnover is £1.35 million or less for the next 12 months, and you must leave once VAT taxable turnover exceeds £1.6 million (gov.uk, Cash Accounting Scheme eligibility). The income tax cash basis has no thresholds at all and is closed to companies. The two regimes share the word "cash" and nothing else, and you can be on one without the other. Our page on the VAT cash basis threshold covers that scheme properly.

The sections the rules actually live in

The page above states the current positions; here is where to check them. The default is ITTOIA 2005 s.24A, which says trading profits must be calculated on the cash basis unless the trade is an excluded trade or an election has effect. Excluded trades are defined at s.25B. The election out into generally accepted accounting practice is s.25C. Capital expenditure under the cash basis is s.33A, and capital allowances are switched off except for cars by CAA 2001 s.1A. The old turnover machinery at s.25A and ss.31A to 31D was omitted from 6 April 2024 by Finance Act 2024 Schedule 10, which is why quoting those section numbers today points at emptied-out text. For the rule itself, rather than the comparison, see our page on the cash basis.

Who Uses Cash Basis Accounting, and Who Cannot

The cash basis is for sole traders and partnerships where all the partners are individuals. That is who uses cash basis accounting by default now, from window cleaners to six-figure consultants, because there is no turnover ceiling.

The following must use accruals, with no choice:

• Limited companies (the cash basis has never applied to companies).
• Limited liability partnerships (LLPs).
• Partnerships with one or more corporate partners.
• Lloyd's underwriters.
• Farming businesses with a current herd basis election.
• Farming or creative businesses with a profit averaging claim in force.
• Businesses that claimed business premises renovation allowance in the previous 7 years, carry on a mineral extraction trade, or have ever claimed research and development allowance.

The first four cover almost everyone who asks. If you trade through a company, this whole choice does not exist for you; company accounts are always prepared on accruals principles.

The Same Trader, Both Bases: A Worked Example

Take Maya, a self-employed electrician in Sheffield, for the 2025/26 tax year (to 5 April 2026).

• She invoices £62,000 during the year. Of that, £8,000 invoiced in March 2026 is still unpaid at 5 April 2026.
• She also banks £5,000 in May 2025 from invoices raised in the previous tax year.
• Suppliers bill her £14,000 during the year. Of that, £2,000 billed in March 2026 is unpaid at 5 April 2026.
• She also pays £1,000 in April 2025 for bills dated in the previous tax year.

Accruals basis. Income is what she invoiced for the year: £62,000. Expenses are the bills relating to the year: £14,000. Taxable profit: £62,000 − £14,000 = £48,000. The unpaid £8,000 sits as a debtor; the unpaid £2,000 sits as a creditor. The prior-year receipts and payments were already counted last year.

Cash basis. Income is what hit the bank: £54,000 of this year's invoices (£62,000 − £8,000) plus the £5,000 from last year's invoices = £59,000. Expenses are what left the bank: £12,000 of this year's bills (£14,000 − £2,000) plus £1,000 of last year's = £13,000. Taxable profit: £59,000 − £13,000 = £46,000.

Same trader, same year, a £2,000 difference in taxable profit. At 2025/26 rates, with both figures inside the basic rate band, that £2,000 carries 20% income tax plus 6% Class 4 National Insurance, so the cash basis defers £520 of tax into 2026/27. The £8,000 unpaid invoice is not escaping tax; it will be cash basis income next year when paid. But if 2025/26 was a high year and next year looks quieter, or if the accruals figure would have crossed the £50,270 higher rate threshold, the timing shift is worth real money.

Treatment Differences at a Glance

Item	Cash basis	Accruals basis
Income recognised	When payment is received	When invoiced / earned
Expenses recognised	When paid	When the cost relates to the period
Stock and work in progress	Ignored at year end; stock is simply a cost when paid for	Counted at year end, moving cost into the year the stock is sold
Equipment, tools, vans	Deducted in full when paid (s.33A ITTOIA 2005)	Capital allowances: AIA up to £1m at 100%, or main pool writing down allowance (18%, then 14% from 6 April 2026)
Cars	Purchase price never deductible; claim capital allowances on the car or approved mileage instead	Capital allowances by CO2 band, or approved mileage
Interest on borrowing	Deductible in full from 2024/25 (the old £500 cap is abolished)	Deductible in full
Trading losses	From 2024/25: sideways against general income or carried back, same as accruals	Sideways against general income, carry back, or carry forward
Bad debts	Automatic: unpaid income was never taxed	Claim a specific bad debt deduction

Two rows deserve expansion: capital expenditure and losses, because both rules changed and both still generate questions.

Equipment, vans and cars

Under the cash basis most capital spend on plant, tools and equipment is simply an expense when paid. Buy a £25,000 van, deduct £25,000 that year. Under accruals the same van goes through capital allowances; the Annual Investment Allowance usually gives the same 100% result in year one, so for most kit the difference is paperwork rather than tax. The van tax treatment of the cash basis only diverges from accruals where AIA would not be available or you deliberately spread claims.

Cars are the exception on both bases. The cash basis expressly excludes cars from the deduct-when-paid rule, but cars are the one asset where capital allowances survive under the cash basis, or you can use the approved mileage rates instead: 55p per mile for the first 10,000 business miles and 25p thereafter from 2026/27 (45p up to 2025/26). Pick one method per vehicle; mileage and capital allowances (or actual running costs) cannot be mixed on the same car.

Capital equipment brought in to a sole trader business from personal ownership, a laptop or tools you already owned before you started trading, is broadly treated as introduced at its market value on the day it comes into business use, and that value is what you deduct or pool, not the original shop price.

Trading losses and the cash basis, 2025/26

Before 6 April 2024, a cash basis loss could only be carried forward against future profits of the same trade. That restriction is gone. For 2024/25, 2025/26 and later years, a cash basis trading loss can be set sideways against your general income of the same year, which includes employment income, pension income and property income, or carried back, under the normal loss relief rules. If old content told you "use accruals if you expect losses", that advice expired in April 2024.

When Accruals Is Genuinely Better

With the interest cap and loss restriction gone, the case for electing out of the cash basis has narrowed to four situations:

• Stock-heavy businesses. A retailer in Nottingham who buys £40,000 of stock in March sells most of it after 5 April. On the cash basis the whole £40,000 lands as an expense this year, cratering this year's profit and inflating next year's. Accruals matches the cost to the sale and gives a stable, truthful margin.
• Finance applications. Banks and mortgage lenders want accounts showing debtors, creditors and work in progress. Cash basis figures can understate a growing business badly, because the growth is sitting in unpaid invoices the cash basis has not recognised yet.
• Management information. If you run the business on monthly figures, accruals numbers mean something; cash figures lurch with payment timing.
• Long work in progress cycles. A contractor in Cardiff invoicing milestones months after the work is done will see cash basis profit that bears little relation to activity.

If none of those apply, the default usually wins on simplicity: no debtors, no creditors, no stock count, and bad debt relief happens automatically because income you never received was never taxed.

Electing Out: How to Choose Accruals

You make the election on your Self Assessment return, in the self-employment pages, for the tax year it is to apply. In practice the accounting software or your accountant handles the box; the substance is that you prepare your figures under generally accepted accounting principles rather than on receipts and payments. The election is made year by year, but in practice you should pick a basis and stay on it, because every switch triggers the adjustments below.

Switching Bases: The Transition Adjustments

The rules make sure every pound of income is taxed exactly once and every expense relieved exactly once across a switch (ITTOIA 2005 Part 2 Chapter 17). The mechanics differ by direction.

Accruals to cash. In the first cash basis year you adjust so that invoices already taxed as debtors last year are not taxed again when the cash arrives, bills already relieved as creditors are not relieved again when paid, and opening stock you have already paid for is brought in as a cost.

Cash to accruals. You bring debtors, creditors and stock onto the books at the switch date. That usually creates positive adjustment income (typically your unpaid invoices, which the cash basis never taxed). By default that adjustment income is spread over six tax years, one sixth per year starting with the first accruals year, and you can elect to accelerate the charge if, say, you have a low-income year to absorb it (ITTOIA 2005 s.239B; spreading under s.239A).

The spreading rule takes most of the sting out of the switch, but it is one more running adjustment on the return for six years, which is a reason not to flip-flop between bases.

Making Tax Digital: The Basis Feeds Your Quarterly Updates

Making Tax Digital for Income Tax makes this choice more visible. From April 2026 sole traders and landlords with qualifying income over £50,000 must keep digital records and send quarterly updates; the threshold falls to £30,000 in April 2027 and £20,000 in April 2028.

Your quarterly updates report income and expenses on whichever basis you use. On the cash basis a quarter where clients paid late shows low income even if you worked flat out; that is fine with HMRC, but your in-year tax estimates will swing with payment timing. On accruals the quarterly figures track work done, at the price of keeping debtors and creditors up to date every quarter rather than once a year.

For most smaller traders the cash basis makes MTD compliance easier: the digital record is close to a bank feed. See our guide to the MTD ITSA April 2026 deadline for who is caught first and what to set up.

Which Should You Choose?

Stay on the cash basis default if your clients pay reasonably promptly, you carry little or no stock, you want the simplest records, and you are not about to hand accounts to a lender. That now describes most freelancers, trades and service businesses, from a graphic designer in Newcastle to a courier in Leicester.

Elect for accruals if you hold meaningful stock or work in progress, need finance-ready accounts, or run the business on monthly management figures. Companies and LLPs have no choice and are on accruals regardless.

Whichever basis you use, the fundamentals are the same: register on time (see how to register as self-employed), claim everything you are entitled to (our allowable expenses checklist covers the common misses), and file by 31 January to avoid late filing penalties.

If you are near a band threshold, expecting a loss, or planning a switch, the timing rules above are worth modelling properly before the year end rather than after it. Contact our team and we will run your numbers under both bases.

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